The SPY Breakout Looks Like a Flop

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U.S. equities have had a slow, choppy go of it for most of 2015. While the broader indices — including the S&P 500 — managed to push to fresh all-time highs, non-confirmation warning signs from various sectors and the lack of momentum are flashing and could soon lead to a mean-reversion move lower in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

beat the bell stock investing adviceI often reiterate that trading, active investing and generally managing ones own money is a game of probabilities. Markets have the tendency to slide sideways around 70% to 80% of the time, which is to say that for the directional trader, the odds often don’t warrant any action. The year-to-date price action in U.S. equities has been one of those times — a real patience tester.

To be sure, the S&P 500, the Russell 2000 and even the Dow Jones Industrial Average managed to push to new all-time highs in recent weeks, yet the momentum with which this has been accomplished is weak at best, pathetic at worst.

SPY ETF Charts

Looking at the below chart of the S&P 500, note that while price continued to rally in February, momentum — as represented by the relative strength index (RSI) at the bottom of the chart — has simply rallied to another lower high, keeping the series of lower highs since last summer intact.

spy etf charts weekly
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When looking at the S&P 500, it also is crucial to understand what the individual sectors are doing, particularly the financial sector. On the next chart I plotted the SPY ETF in green, the Financial SPDR (NYSEARCA:XLF) in orange, and the iShares Dow Jones Transportation Average ETF (NYSEARCA:IYT) in red.

Note that while the SPY broke past its 2014 highs, both the red and the orange lines did not overcome their 2014 lines, thus giving us so called non-confirmation by two important parts of the market.

I constantly repeat that without participation of the financial sector, the S&P 500 (and really, just stocks more broadly) cannot rally sustainably, given its large proportion of the overall index.

spy xli iyt
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Lastly, and purely looking at price action on the daily chart of the SPY ETF, note that since last November we had three periods where price rose slowly and steadily, two of which then led to quick 5% selloffs. This latest slow move higher from recent weeks increasingly looks to be on the same path (i.e., ready for a swift mean-reversion move lower).

spy etf daily chart
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Active investors could look to sell short the SPY ETF on a break below $210 (preferably on a daily closing basis), for a move toward the $200-$202 area.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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