Firming near short-term retracement
Trend following and mean reversion are two types of trading strategies. Trend followers wait for a reversal and confirmation with a support break or resistance breakout. Mean reversion traders look for overbought or oversold conditions to pick tops or bottoms. The two styles are diametrically opposed, but both systems have produced successful traders.
Trend followers are short-term bearish after Wednesday's gap down and break below 109. Even though the short-term trend is down, mean reversion traders are considering long positions because SPY is short-term oversold and near retracement support. In addition, sentiment is clearly bearish and the ETF is showing signs of firmness. I am currently in the bear camp. However, it is important to understand what could go wrong with a trade. It is also important to prepare for the unexpected, which happens more than we expect.
On the daily chart, SPY has support around 106-107 from the 50-62% retracement zone and the broken trendline extension (broken resistance turns support). In addition, the ETF became short-term oversold after a 4+ percent decline the last six days. 5-period RSI has been below 30 for three days and 14-day RSI is firming in the 40-50 zone. At the very least, the odds favor an oversold bounce. Internal strength will determine if this bounce has legs or not.
On the 60-minute chart, SPY gapped down four times in the last five days. SPY managed to rebound and firm after the last two gaps, but stopped short of a short-term breakout. I am leaving first resistance at 109. A break above this level would call for an oversold bounce with a target in the 110.50-111 area. Resistance here stems from the 50-62% retracement and broken support. I would also expect RSI to hit resistance in the 50-60 zone.
Key Economic Reports:
Tue - Aug 17 - 08:30 - Housing Starts
Tue - Aug 17 - 08:30 - PPI
Tue - Aug 17 - 09:15 - Industrial Production
Wed - Aug 18 - 10:30 - Oil Inventories
Thu - Aug 19 - 08:30 - Jobless Claims
Thu - Aug 19 - 10:00 - Leading Indicators
Charts of Interest: CQB, EBAY, ERTS, F, KG, PBR, PNRA, TEVA, WAG
This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
