What the SPY Daily Chart Told Me Today

So, the market took a 100 point crap at the end of the session, catching most traders a little off guard.  Let’s see – last Friday, Cramer and all the CNBC talking heads said that we would be down on Monday because the health care bill will cause a slowdown in growth – find dividend stocks and hide! lol.  Dividend stocks are great, but I’m a day trader.. blah to dividends – I keep those in my IRA.

Now, CNBC is all fired up and bullish. UG. 

I took the last hour as a sign.  Not a sign that we’re about to enter a reversal, which we may be.  But, instead, a sign that the market is still nervous and you can never be lazy with your trades.  It’s very important to ‘stick and move’, as Kunal would say, if you’re a pure technical trader who has little regard for fundamentals. 

What the SPY is telling me:

Let’s keep it simple and look at the SPY daily…

Phase 1: After a bottom was put in at the beginning of November, the SPY quickly shot up into a land of congestion… lots of gap-ups and gap-downs.  No real trend here (good environment for scalping, but painful for swinging short term).
At the same time, the bollinger bands narrowed and volume decreased. This is often a precursor to a move.  In late December we got it.

Phase 2: Late December through mid-January showed a nice little bull run.  The only big issue was volume. Seasonality, yes, but low volume doesn’t support bull moves well and often results and a fast pullback – late January into February. There where 3 key shows during this bull move that hinted at an impending reversal:

  1. Low buy volume (highlighted in orange), followed by down days with higher volume (orange arrows). 
  2. Ryno gap – The white highlighted space between the top bollinger band and the candles. I call it the Ryno gap because I’ve never read anything about this anywhere else – but, it seems to be telling.   As the gap between the bollinger band an price widens during a bull run, the likelihood that we’re about to reverse increases.  Keep in mind that this only works in a bull run where prices are sticking to the bollinger band.
  3. MACD bearish cross – highlighted with a red circle.

Phase 3: Current bull run.  Notice the low buy volume (highlighted in orange) followed by higher volume down days (orange arrows).  This is the same setup we saw in mid January.  Other similarities:

  1. Ryno gap widening
  2. MACD really wants to preform a bearish cross.
Other less telling signs – RSI14 is sliding with top heavy Slow Sto.

Now What:

As you can tell, I think the market is about to reverse.. it may or may not, but I’m prepared just in case we repeat what happened in February.  No need to panic, no need to short everything, and no need to blindly wait for a reversal and not play what is given you.  If the market is up tomorrow, I’ll scalp some longs.. however, since I’m short biased right now, I will hold fewer positions over night and I’ll spend more time in scalps. 

There will be plays, long and short, but it’s time for me to get a little cash heavy and see what the market tells me going into the weekend.  I’ll probably trade less, read more, and enjoy the beautfiul weather here in Austin. 

See you in the boom factory!



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