Change of Character in Trend - Lower Bollinger Band Probable Target - SPY 11-10-17

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The chart here is SPY on a daily time frame.  It shows several months of the recent uptrend and nicely illustrates simple concept in technical analysis pertaining to Bollinger Bands.

Once the center line is crossed on a closing basis, the idea is that the nearest band becomes a price target.  So in an uptrend, when prices close below the 20 day average center line in this case, the lower band becomes a price target.

In this case we can see the action in June where prices closed below the band in the second half of June, and then tagged the lower band after about 5 days.  In August, there was a wide range break below the mid point that tagged the lower band the same day.

Now notice the current trend up since August.  I have marked with green arrows the 4 days at which price came down to touch the center line.  Each day price reversed to close off its low and above the mid point.

Now when I see something like this, it indicates to me that program trading may be coming in using the center point as a buying trigger.  But here is a more subtle point I have picked up on over the years and have written about here before.

If you look at the last 3 times the mid point was touched (before yesterday), you can see that the next day gapped up.  In fact the next 2 days gapped up in all 3 instances.  Similar comments apply to the March 9 and 14 center line reversals as well as the June 16 center line reversal.  Gaps ups following the center line test, generally indicate "successful" short to intermediate term tests of the center point.
So the norm for a continued trend is the programs kick in to buy at the mid line and then continue the buying into the next session and create the gap ups.

So when the character changes and price does not gap up, PAY ATTENTION.  To me it indicates that the normal trend continuation program buying pattern is not in place. 

In fact a decent size gap down the following day, indicates a failed test of the average and a probable quick test of the lower band.

This morning prices are set to gap down moderately.  Coupled with the clear bearish divergence at the recent highs and the weak/negative breadth as evidenced by the McClellan oscillator being negative for a couple weeks as price rose, I would suggest that this current gap down will likely lead to a quick move to the lower bollinger band.

Currently the near term support on a move down is 254.00.  But I think prices clearly have more risk than this to the downside in the coming couple weeks.

The last time I remember such and extended period of negative McClellan oscillator readings as prices were making higher highs was Sept 2014 before the vertical decline into mid Oct. 2014.


Pete