U.S stocks ended higher on Monday as a broad-based rally off somewhat technically oversold readings managed to take hold and squeeze out some weak short sellers.
Part of the reason for the rally was news that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) purchased shares in Apple Inc. (NASDAQ:AAPL) in the first quarter, which was good for a 3.75% rally in the name.
Other than that, however, little changed on Monday, and the S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — remains in a precarious spot where the risk-reward proposition on the short side looks attractive.
After nearly 20 years as a trader, investor and adviser I have come to respect the fact that there are always at least two ways to look at any story, stock, index, commodity or currency. The best we can do to put odds in our favor at any given point is to “trade” in the direction where the most signs are pointing to from a fundamental, technical and structural perspective.
Looking at the SPY ETF at the current juncture, I see the path of least resistance as being lower.
Why?
Aside from this weak technical picture, which we will look at on the below charts, corporate earnings continue to come in weaker on a year-over-year basis, economic growth data is displaying the same trajectory and seasonally, the May -October period tends to be notably weaker than the rest of the year.
Could we be setting up for a turnaround Tuesday again today? Let’s check out the charts.
SPY ETF Charts
To gain some perspective, let’s look at the multiyear chart of the S&P 500.
While market participants witnessed several wild gyrations in the S&P 500 over the past 12 months, the index has largely been trading in a bigger-picture consolidation pattern ever since upside momentum slowed in late 2014. Two weeks ago, this consolidating finally led the yellow simple 50-week moving average to break below its blue 100-week MA.
Although I must emphasize that I am no great fan of putting too much weight on such simple moving average crossovers, it is notable that the last two times this took place — in 2001 and 2008 — this boded poorly for the S&P 500, as you can see.
On the daily chart of the SPY, we see that once it broke above its yellow 21-day simple moving average in February, the steady rally managed to keep it above there until early May. Over the past couple of weeks, the index has remained near this good near-term barometer of strength and has well-defined support around the $204 mark for now.
Moreover, Monday’s rally simply pushed the SPY ETF higher for another retest of this simple moving average, and if history is any guidance, then today we could well be setting up for another ‘turnaround Tuesday’ where stocks move in the opposite direction of Monday … which in this case would be lower.
Active investors and traders could look to play the SPY lower as long as it remains below the $207 area, using a near-term stop at $211 and an initial price target near $200.
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