SPY Update - Expecting Price to Make Another Move Lower Into April of Beyond

Click on Chart to Enlarge

The above chart is a SPY daily chart.  And back on 2-14-18 I had posted regarding past similar instances of selloffs and rebounds following put/call ratio dual time frame imbalances like we were seeing in January of this year. 

At that time I noted that the subsequent rebounds of the 4 previous noted comparable instances had retraced 50-75% of the initial decline.  And I overlaid the actual % and time gains on this chart as indicated by the lines rising up from the 2-9-18 low.  It is notable that tomorrow will equal the time of the longest rebound out of the previous 4, before the decline began its next move down.  So we may be nearing the time point here where prices could be peaking and another round of hard selling comes in.

The blue box on the chart above represents the range of declines over the next 3 months of the 4 comparable instances following the put/call ratio signal.  The indication here is that we may expect another wave of selling to break the February low.

The cycle analysis of current active cycles indicates upward cycle trends into next week and possibly a bit beyond.  But following that, there is downward cycle activity into mid April or beyond.

Basically at this point I am looking for a risk reward set-up or clear technical divergence to develop to initiate a short/inverse position in SPY or related ETFs.

Another concept that I have discussed many times over the years on the blog is "price logic".  This objectively gauges which direction of market price action is stronger/weaker and infers the direction of the next "strong" market move.  On the chart above we can see that the move down from Jan to Feb was very directional and that the ensuing rebound has only partially retraced the decline in more time than the decline took to form.  The idea here is that the current rebound is a counter trend move to a larger downward trend or formation of at least 3 moves....DOWN-UP-DOWN

The other main possibility that I see is that the Jan-Feb decline is the first move down of a triangular pattern or sideways move, meaning that most all price action would occur within the bounds of the Jan highs to Feb lows.  I view this as a less probable scenario but we will see.


Pete

QQQ Short Trade Set Up - Price Logic and Bearish Divergence

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The chart shown here is an hourly of QQQ which is the Nasdaq 100 ETF.  For those who have followed this blog for a while and understand some concepts related to price logic and divergences, this should be an interesting pattern to watch unfold.  There is an obvious bearish set up here to short or inverse the Nasdaq if an appropriate signal occurs beneath point 0.

So notice the the move from -1 to 0 was retraced in less time than it took to form.  That indicates a probable short term (at least) pattern completion and the beginning of a new downward pattern in the market of some degree.  Now it is clear that the price action upwards from point X has occurred more slowly and with clear corrective/overlapping swings, suggesting that the move up from point X is probably a correction against a still developing larger downward price trend.

Since the smallest "pattern" that can develop is a 3 wave move, and point X has not been breached, it would seem likely that the next move down is likely to move below point X.  The other possibility from a pattern perspective is that a sideways/triangular pattern is forming within the bounds of points 0 and X.  In that case price would not be expected to break point X.

Now the study below the chart is a money flow index which is basically an RSI of both price and volume combined.  So it tends to be a leading indicator more so that price only based studies like MACD or RSI, etc.  Currently the MFI is displaying a bearish divergence at today's new high for the recent rally from point X.  Now the MFI is not at an extreme level, so it is arguably to significant.  But the other reasonable interpretation is that the current up move is very weak and this is an imminent sign of topping and another directional downward thrust in price.

Analysis is easy.

Consistently making objective buys, stop adjustments, and sells is much more challenging.

So for the trader here this pattern creates a nice set up to short the market or make a stop adjustment on an open short position to above point C if a sell signal is generated below point 0.  Another speculative play here would be to buy put options on the indexes here.  An ATM put option with April 24 expiration would have a very reasonable 100%+ profit potential if prices decline to point X before expiration.

If you have questions or ideas on managing open trades here or entering new positions, comment and we can proceed with further analysis and planning.

Pete

Price Logic Confirms Probable New Downward Pattern Off The Recent Highs In Stocks

Click on Chart of QQQ to Enlarge

The hourly chart of QQQ above shows that the current decline off of the 3/20/15 high is occurring rapidly and has retraced the recent rally up from 3/13 in less time than the rally took to form.  That is reasonable price logic confirmation that a larger phase of market action is ending and a new (at least short term) downward pattern has begun.  If a major top is not in place, then the pattern may not result in much further downside.  But given some of the things I've shown here over the last several weeks, the overall context seems ripe for a market high.

I would not advise an exit of short positions here until some bullish divergence develops.  And even then, a partial exit may be wise with prospects of greater gains.

Given the price is now at a 1 month low, my bottom spotting algorithm with begin to flag certain 1 day reversal patterns as potential bottoms.  Those would be my preferred exit signals here - waiting for at least the shortest term signal, a "1 month low" to get picked up by my system.

Also given the data point registered on Monday, please review the stats in my December post highlighting the put/call ratio sell warning.  

Pete

SPY Time Pattern Analysis and Logic

Click on Chart to Enlarge

The review of SPY tonight will rehash a little of what I have pointed out in recent posts, and also add a pattern concept.

First off, as suggested in the last post, the short-term price logic continues to confirm a bullish trend.  The up moves are directional, large and fast.  The intervening downward move was small and "slow".  And again with today's move higher, the intervening downward move was completely erased in less time than it took to develop from high to low.

So the next thing to look for here in terms of when the trend is potentially ending is to look for a divergence pattern to develop.  So in the chart above I show a momentum indicator.  If price makes a higher high, but the momentum fails to make higher highs, that would indicate a slowing down of the market, which is the typical pattern that precedes a reversal.

There is an unfilled gap down above prices, and it is highlighted on the chart.  Sizable gaps have a strong tendency to fill within a couple week time frame.  And so as we see prices rallying here, that gap is an obvious target of potential attraction for prices, and may also offer a potential point of chart resistance.

The pattern concept I want to point out here is that when two successive moves in a pattern are similar in time, the next move is typically longer.  As an ideal ratio the next move may take about the same time as the total time of the prior 2 moves together.  That is what the vertical lines are showing as a time projection on the chart above.  That would suggest we may see price move generally high until Friday.  From my pattern based research, a typical ABC pattern has a median C leg that takes a little less than the total time of A+B.  However the AVERAGE C leg, takes about 1.17 times the time of A+B.  In any case, I am simply offering the suggestion here, that even if this move up here is counter trend in a correction, we may still have a couple days up in the current portion of the move.

Pete

Short Term Price Logic on SPY

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This chart is a 15 min candlestick chart of SPY.  I am just following up here with the short term movements in SPY recently.  The last couple posts suggested that we would likely see SPY attempt a rebound given the short-term technical analysis and intermediate term extreme in put/call ratios and VIX.

So here we are a couple days into a rally and let's see what we may expect.  First off the rally off the recent low completely retraced the last wedging portion of the decline in far less time than the decline took to form.  That gives us a logical indication that the short-term psychology and trading algorithms turned bullish.

Next we now see that the decline off the peak of the initial thrust off the low, has been very small and has already taken as long as the rally from high to low.  So this is additional logical confirmation that the upward price action is still dominant and the downward moves are corrective on this short term analysis.

Based upon this, I would suggest that it is probable that we see a rally up above Monday;s high before this rally completes.  So at this point we have a price logic "set-up".  A very simple analysis and yet a powerful logical construct to apply to market action in order to gauge the dominant trend.  From this point for trading, I suggest having an objective indicator signal to give a trade entry and trade follow through as far as setting stops and moving stops.

Given the recent post about put/call ratios suggesting that the recent spike above 1.0 may be signs of a larger shift down, I think it would be wise to apply similar logic on any decline that rapidly retraces an upwards move.  If we see that type of action at a lower high than the recent all time highs, then it would offer a possible short position.

The last 3 daily sessions in SPY have occurred on lower volume.  That is arguably a sign of weakness.  And given the larger scale turn down off of divergences in the weekly MACD, etc, we should be keen to a potential sucker rally here.

I will track short-term moves over the next several sessions because of the possible longer term change in market character here and the potential to establish short or inverse positions on this rally.  As of the current time of writing, I would suggest that shorting on a break to a new corrective low may be a legitimate strategy here given the larger currents.  That type of play has generally not offered a good reward to risk ratio in this bull market, but with willingness to quickly adjust a stop toward breakeven it could offer a viable trade in my opinion.

Pete

Is the Current High in Stocks a Major Top?

Based on the application of logic to pattern based market analysis, we can contextualize market movements beyond a simple qualitative or visual analysis.

One of the key logical concepts to understand and apply to market pattern analysis, is that when an important phase of market action completes, the last portion of that price pattern should be completely retraced by subsequent price action  - in LESS time than the last part of the pattern took to form.

Additionally, if a larger scale or "degree" pattern has completed, then the new psychology of the market will be evident by explosive price action in the direction of the new trend.  In a practical sense, when a trend shifts, it is apparent on a price chart by a move that is both larger and faster than any counter trend movement in the prior trend.

Applying these concepts to the current market, I would say that if price is back below the May 15th low in SPY, by Aug 13th, then the price action would be logically confirming a large scale top has completed at the recent high.

So keep these ideas in mind moving forward.  If we do see such confirmation of a trend shift, it will likely be part of an explosive downward phase of price action.  In my experience, the initial phase of a trend shift can be very vertical and most traders will miss it and wonder kind of what the heck just happened.  Often times then the initial sharp movement down will be retraced by a more time consuming rally, that will offer a better and more clearly visible shorting opportunity.

Thus far on this correction, there has been no buy signal generated by my bottom spotting system.  If there is one I will note it here, but dependent upon the technical analysis at the time I may offer commentary as to whether I think it likely to be a successful signal.  Recent signals have been near perfect for over two years.  However, it may be reasonable to expect a solid bull market buy signal to be negated at the onset of a new major bearish trend.  We saw similar activity coming off the major 2011 highs.  I will here update as things unfold.

For now I personally view the dominant price direction to be DOWN in US stock indexes until otherwise noted here on this blog.