The S&P 500 as represented by the SPDR S&P 500 Trust (NYSEARCA:SPY) over the past few trading days has dropped about 8%. In the short-term it looks increasingly likely that a bounce could occur. A specific level on the charts is where this could start coming to fruition.
If you have been reading this here column of mine for the past few months, you have seen me repeatedly warn about the market’s low volatility march higher, which by late January/early February turned into indiscriminate buying. I constantly warned that the vertical charts of many stocks and indices were not sustainable, and that once a mean reversion to the downside takes place, it will likely be sharp and nasty.
While I am not here to take a victory lap, I do want to make sure we can now map out a plan of action for a possible oversold bounce trade.
SPY ETF Stock Charts
First, note that the big rally from October 2019 into mid-February blew the SPY ETF above its longer-term channel. On this multi-year chart with monthly increments we can also see the buyer exhaustion that happened in the end of January and so far again at end of February. To be clear, the month of February is not yet over and the monthly candle can still change.
Either way, the overhead supply/resistance is clearly visible on the charts here. In other words, a ‘sell the rallies/bounces’ tactical approach is what I want to operate from for the time being.
On the daily chart we see that the SPY ETF in just a few trading days now erased what took it more than two months to accomplish on the upside. Thus; stairs up, elevator down. This particularly applies when charts go vertical as they have in recent weeks.
On the daily chart we can also find a so-called ‘confluence area of technical support’ that may offer us an opportunity for a bounce trade.
Trading SPY ETF
The area around $303 – $305 is still another 2% – 3% lower from here. It is anybody’s guess when we get there, but said area is made up of the red 200-day moving average as well as previous horizontal resistance, i.e., a previous breakout point.
I am reluctant attempting to catch a falling knife here, but at the $303 – $305 confluence area, if and when we get there, the reward-to-risk is well-defined.
A first upside target would then become the $318 – $320 range. As a stop loss would serve any strong bearish reversal upon arrival of the entry support zone.
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