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The S&P 500 Has Reached a Key Inflection Point (SPY)

The equities stampede over the past few weeks so far amounts to about an 8% rise off the late September lows for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). While the jury still is out whether the lows for the year have been seen for the index, the SPY ETF is coming into an area of technical resistance of major proportions.

The S&P 500 Has Reached a Key Inflection Point (SPY)Very simply, if this area can be overcome, then at the very least a retest of the year-to-date highs looks likely toward year’s end, but the more forcefully we reject this area, the higher the likelihood of revisiting the August/September lows.

As we slowly meander toward the last two months of the year, the bulls have seasonally favorable winds at their back. A good part of this seasonal strength comes from underperforming fund managers having to chase markets higher, tripping over each other to buy stocks that have shown relative strength all year. Prudent traders and investors are aware of this and respect these forces at work, which is different from completely shutting one’s eyes to a potential bearish surprise.

On Oct. 9, I discussed the already overbought state of the Dow Jones Industrial Average but warned that a further melt-up was possible in the near-term. Both the Dow and the S&P 500 have consolidated a bit, but continue the upward pressure (albeit on notably less momentum).

SPY ETF Charts

Looking the multiyear chart of the SPY ETF, we see that while the 2009 line of support held once again at the late-August lows, the broken 2011 support line now looks to be a good reference point for resistance.

In the larger sense, the major difference between this year’s correction and those of recent years is that the August waterfall came after stocks mostly trotted sideways all year. This broke many areas of technical support and left many sectors and important parts of the market vulnerable for further losses.

SPY ETF chart weekly
Click to Enlarge

On the daily chart below, we see that the medium-term moving averages began to slope lower in late August just as the SPY ETF violently broke lower. The bulls also like that the S&P 500 made a marginal higher low in late-September versus their August lows, although I would point out that most corrective moves in recent years saw marginal lower lows before powering higher.

SPY ETF daily
Click to Enlarge

Most importantly now however, the blue band of resistance is made up of:

  1. The downsloping blue 100- and red 200-day simple moving averages
  2. Obvious horizontal resistance (former support)
  3. The 61.8% Fibonacci retracement line of the entire sell-off from the May highs down to the August lows

What’s more, a great many momentum oscillators are now in record overbought territory, which begs for at least a multiweek pause in the SPY ETF.

So, given the layer of overhead resistance above yet seasonally favorable tailwinds for stocks, what’s an active investor to do?

Active investors could look to either wait for a first bearish reversal day where a failed intraday rally leads to a lower daily close, or more aggressive traders could look to nibble on some marginally out-of-the-money put options now that implied volatility has dramatically come in. The $198-$200 area on the SPY ETF offers a first layer of support.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

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