SPY fills the third gap

SPY moved back below 110 to fill the third gap, but this is not enough to affect the medium-term uptrend. After surging to a new reaction high in mid November, the ETF has been locked in a four point trading range since November 10th. This range extends from 108 to 112 with 110 as the focal point. Trading within the range is treacherous as the ETF bounces above and below 110 every week. The Bollinger Bands continue to narrow as volatility contracts. This is also reflected in the Bollinger Band Width indicator, which has been below 4 since November 20th. Contracting volatility does not provide directional clues. It does, however, suggest that SPY is gearing up for a volatility expansion. This means we could see a directional move sooner rather than later. But which way? Confirmed outside reversal days and volatility contractions led to pullbacks in late September and late October (blue lines). SPY currently sports a similar setup with Tuesday's move below 110.

The 60-minute chart shows SPY edging higher over the last four weeks. I elected to draw through the opening low on November 27th, which was the Dubai reaction on the Friday after Thanksgiving. Even though this range is quite choppy, SPY has been edging up with higher highs and higher lows. Six gaps in 16 days makes it pretty much impossible to play swing reversals within this range. The only way to profit would be to buy near support and sell near resistance. Here we are again. The swing is down after yesterday's gap below 110, but SPY is trading near support around 109-109.5. This is the point where individual trading style and preferences come into play. Bottom pickers see a low risk opportunity near support. Short-term reversal players see a downswing as long as resistance at 111 holds.