SPDR S&P 500 ETF Trust (SPY): Where Should You Sell This Rally?

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The S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — on Tuesday kicked off March with a 2.35% rally that in many ways felt like the ultimate bear wedgie.

SPDR S&P 500 ETF Trust (SPY): Where Should You Sell This Rally?While stocks broadly remain in a bear market that still should see the S&P 500 fall toward the 1,600 area at some point in 2016, bears must remain patient and pick their spots for short entries or risk getting caught in moves such as what we witnessed on Tuesday.

On Jan. 19, I last shared my views on the SPY ETF and said that a potentially sharp oversold bounce looked to be near. I also said that this bounce could take the SPY back toward the $200 area, which had acted as support and resistance off and on over the past 18 months or so.

After Tuesday’s face-ripper rally, the SPY is now just about 1% away from my $200 area upside target after having traveled more than 9% off the January/February double-bottom. Reward to risk on the long side (to yours truly) now is much worse than it was when fear ruled the streets near the January and February lows.

Funnily enough, investor optimism had surged over the past few trading days, and things like the put/call ratios had decreased. In other words, investors somehow feel more comfortable buying something like the SPY ETF after a 9% rally. That’s the way it goes, which is why the easiest money in markets is made by fading investor emotions upon confirmed bullish or bearish reversals.

To the charts we go!

S&P 500 (SPY) Charts

Starting off with the long-term look, we see that after the SPY ETF in 2013 finally broke past its year 2000 and 2007 highs, it shortly began losing upside momentum. This is represented by the Relative Strength Index at the bottom of the chart making lower highs ever since late 2013. In essence, this was the early beginning of the topping process in the S&P 500.

When stock break out of such longer-term secular bear markets, there most often tends to be a mean-reversion move, or retest of this breakout area. The SPY over the past 18 months has tested the $180 area as support numerous times. If and when this area breaks as support, then a fairly swift drop toward the $160 area or marginally lower could ensue, which would then satisfy a retest of the 2013 breakout area (blue zone).

SPY ETF chart weekly
Click to Enlarge

On the daily chart, we see that after Tuesday’s big rally, the SPY ETF is finally reaching back toward an area roughly between $198 and $200, which offers plenty of confluence resistance from many technical aspects, including the blue 100-day moving average. The MACD momentum oscillator at the bottom of this chart is also (for the first time in this recent bounce) finally reaching what may be early stages of overbought readings.

SPY ETF chart Daily
Click to Enlarge

Bear market rallies can be much sharper and longer in duration than most bears bargain for. After a nearly 10% stampede off the January/February lows, reward-to-risk in the SPY is much worse, and anywhere in the $198-$200 area is a good spot to take profits on any long positions.

Once the SPY ETF sees a confirmed bearish reversal, we may look to short the index once more. Until then, take profits and let the remaining bears get squeezed so that the short-side trade becomes less crowded.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/spdr-sp-500-etf-trust-spy-sell-rally/.

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