Stocks broadly speaking last week continued their bounce off the February lows, which offered frustration to the bears but a confidence boost to the bulls. Some of the bearish positioned fund managers I spoke with last week expressed once again coming across a far too familiar feeling of getting squeezed on their short positions in things like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) … something they have had to deal with for the better part of the past 9 years now.
A long-time trader once told me “you can learn a lot by just watching.” And judging by last week’s intraday movements in the afternoon sessions in the U.S. stock market, some people may be concerned about this market rally of the past two weeks. On Tuesday, Wednesday and Thursday afternoon last week the SPY ETF gave up the morning-session rallies. While this did not happen on Friday, to me the midweek price action does raise an eyebrow.
The SPY ETF in the Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
The multiyear chart of the SPY ETF shows us three important things; 1. The January rally led to an overshooting of the longer-standing up-trend (black parallels), 2. The late-January/early February sell-off halted at the lower end of said up-trend and 3. the two-week bounce off the lows now has the SPY ETF back at the upper end of the range.
Given point 1 above a mean-reversion move lower like we saw through a technical lens makes a ton of sense. The question now is whether the S&P 500 as well as a plethora of large and important stocks will re-visit the late-January overshooting highs or if we are now back in the longer-standing up-trending range for a while.
I don’t have a definite answer to this question (hint: no one really does), but active and more aggressive traders wanting to take a bullish stance for a trade could buy some SPY ETF here toward a $285 price target. Any bearish reversal on a daily closing basis would signal a stop loss and if the reversal is strong enough could even signal lower highs and thus trigger a short-side trade back down toward he $255-$260 area. This type of an open mind strategy in my 20-year experience is the only way to profitably navigate a choppy and volatile market for traders.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the sector front energy as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) continues to act in a lackluster way, yet active investors may find a well-defined support area to trade against.
Note how the XLE ETF over the past two weeks has chopped back and forth in a relatively tight trading range. The lower end of this range is at $66.60, which bullish traders could use as a stop loss for bullish trades with an initial upside target around the $72 mark.
In summary, while buying the dip from three weeks ago has worked once again thus far, plenty of signs tell me that we will see more volatility this year (a base case for me), which also requires market participants with active approaches to become more active than they were in 2017 — a very low volatility year.
Check out Serge’s Trade of the Day for Feb. 26.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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