Another Test of 200 Day Moving Average in SPY - 5-3-18

I have discussed the tendency of markets to rebound from key moving averages in the past, and also given perspective on some subtleties which follow.

First, from my perspective an average like the 200 day moving average in SPY leads to rebounds when touched simply because of groupthink which is programmed into the market.  So computerized/automated trading programs may involve buy/sell action or contingencies at these commonly followed averages.

So there is nothing magic about it.

What I have seen in the past is that strong and lasting rebounds from key averages often are initiated by gap ups and closes above the open following the decline to the moving average.

When we see weak (no gap up, and or no follow through after the gap up) price action following the touch of the average, that may be an indication that the market will not continue its rally attempt.

TAKE NOTE of multiple weak follow through attempts followed by even slight breaks to lower lows.  What can be happening there is that selling is coming in following every automated buying blip, and THEN when the buying triggers are exhausted, the bottom falls out underneath so to speak.  So there can be a rapid downward movement in prices.

Given that since February, each successive touch of the 200 day moving average has held, BUT BEEN SMALLER in the attempted rally, we find ourselves at a point of convergence that is about to break.

I would argue that it would be correct to short sell on a stop order as it breaks to new lows following today's rebound attempt.

Active cycle analysis suggests to me that any rebound from here may be short lived.

I don't know how strong a move down will occur on a price break, but I have seen this type of exhaustion in enough markets enough times to recognize the risk of a big move down as well as the opportunity for rapid price moves and volatility expansion which can work in one's favor if positioning for a breakout.

Since a contracting triangle appears to be forming, I am alert to the possibility of an upside breakout and continuation of the bull market.  But it appears to be unlikely to me that it will occur at least for a few weeks.


Pete