commentary on technical state of SPY

Discussion in 'Trading' started by deronwagner, Nov 20, 2002.

  1. Just our opinion and some observations on SPY. . .

    Yesterday was another roller coaster ride in the market, but we managed it well by watching the key resistance/support levels in the indices and only making trades when either the S&P or Nasdaq futures violated those levels. As such, we avoided much of the indecision in the markets and only traded the clear moves that offered a high-probability of profit with a low potential risk.

    Since we were short coming into yesterday morning, we lowered our stop in the overnight SPY position to just over the high of the upper channel of the downtrend from the highs of the selloff that started on Monday at 2 pm. This positioned us to realize more profits if the S&P collapsed on the open, but also caused us to lock in over a point of profit in the event the S&P reversed, which it did in the late morning session. Take a look at how we determined where to set our stop on the overnight position of SPY yesterday:


    Notice the long green candle where SPY initially broke the upper channel of the downtrend, which is where we took profits on our short as well. If you look at the same chart of both DIA and SMH, you will see that we took our profits on those overnight shorts at the exact same point, which is when they both broke the upper channel of the downtrend from the previous day.

    After covering our overnight short positions, we watched the market for several hours until we saw just the right opportunity present itself in the afternoon session. This occurred when SPY failed the breakout to hold the breakout above the upper channel of the secondary downtrend line from Monday morning's highs and dropped back down below the lower channel of the uptrend that was forming intraday. This signalled a low-risk short opportunity in SPY, which is where we re-entered it short. We subsequently covered when the SPY tested the lows of the morning session, forming a double bottom. Take a look:


    The Nasdaq (QQQ) and Semiconductor index (SMH) both showed relative weakness to the S&P (SPY), which is evidenced by the fact that the intraday day high on the Nasdaq was up to the low of the previous day, whereas the S&P rallied beyond the previous day's low. That is why we shorted QQQ and SMH more aggressively than SPY. DIA was even stronger than SPY in the afternoon, which is why we did not short that index on the afternoon re-entry. Overall, it was a good trading day and every trade we entered and closed yesterday was profitable. Using trendlines such as these to determine where to take profits and when to enter trades is just fundamental technical analysis, which is what we focus on. We've found that the more simple and focused we keep our trading, the more profitable we are.

    Going into today, it looks like head and shoulders city out there! You probably noticed there are now several head and shoulders patterns all coming together at once with the S&P futures (and SPY). If these follow through to the downside, we could see some sharp selling in the index. On the other hand, if these head and shoulders patterns fail, meaning the market rallies back above the heads, then we would expect an equally strong rally. As we have been talking about for the past several days, SPY is in the process of completing the right shoulder of a h&s pattern on the daily chart (click here to see yesterday's daily SPY chart). However, there are also two additional h&s patterns forming on a shorter time frame. One of them is forming over the past four days and the other one formed exclusively during yesterday and closed at the right shoulder. First, take a look at the h&s that formed intraday yesterday (using a 5-minute chart of SPY):


    And finally, take a look at a 4-day, 30-minute chart of SPY, which shows a larger head and shoulders forming:


    As you can see, that makes a total of three head and shoulders patterns that the S&P is currently in the process of completing. The last chart above clearly shows that a break of the neckline will probably result in a significant selloff in SPY. Additionally, SPY closed just a few cents above its 20-day moving average, which is an important support level. By the way, have you noticed how much better technical analysis works with the index ETFs such as SPY compared to individual stocks? That's one of the reasons why our profits have increased since we began trading ETFs.

    While SPY has the clearest head and shoulders pattern setting up, the Nasdaq and Dow charts don't look much better. Although we never want to get too much of an opinion on what the market is going to do, we feel that a breakdown in the S&P is likely, especially once the neckline is broken over the past four days (around 89.80), and subsequently on the daily chart around 87.50. If, however, those levels are not broken, we will probably take a "wait and see" stance to trading because there is no technical reason to be long SPY right now either.

    Just our 2 cents. . .
  2. thats some good stuff, although I try not to have opinions and stick to my signals....I like this, how can I see more???????
  3. I also see head and shoulders galore. The only thing that gives me pause is that we're entering December, and isn't that supposed to be a rally month?
  4. tampa


    Damn, those head and shoulders patterns are deadly accurate - so how much do you charge for this kind of advice?
  5. Tea


    Why the hostility? He was just offering his opinion.

    No pattern is perfect and this one didn't break the neckline. Instead it bounced off a daily trendline.

    Below is a story posted on another forum that is might be a good read for this forum:

    A group of frogs travels through the woods, two of them fell into a deep pit. All the other frogs gathered around the pit .when they saw how the deep the pit was .they told the two frogs that they were as good as dead .the two frogs ignored the comments and tried to jump up of the pit with all their might. All other frogs kept telling them stop, and they were as good as dead

    Finally one of the frogs took heed to what the other frogs were saying and gave up .he fell down and died .the other frog continued to jump as hard as he could .once again the crowd of frogs gathered and yelled at him to stop the pain and just die .he jumped even harder and finally made it out

    When he got out the other frogs said ”Did you not hear us ?” the frog explain to them he was deaf .He thought that they were encouraging him the entire time

    The story teaches three lesson

    1-the power of life and death in the tongue .an encouraging words who is down can lift them and help them make it through the day

    2- A destructive words to some one who is down can be what it takes to kill them .BECAREFUL WHAT YOU SAY .Speak life to those who cross your path

    3-YOU can DO whatever you set your mind to .Just don`t let others MAKE YOU BELIVE YOU CAN`T
  6. ddefina


    Good stuff Deron, keep it coming. Your thoughts on the future would be interesting as well. Which S/R points you are looking at for next day, etc.
  7. As I mentioned in the post, we were not going to short it unless it broke the neckline, which it did not. We also mentioned that if the head and shoulders did NOT follow-through that we expected an equally strong rally.

    So, no money lost and no big deal. From my observations, head and shoulders patterns follow through over 70% of the time, so why not play the odds? If they don't trigger (break the neckline), you simply don't enter the short. And my "deadly accurate" advice is only $49 per month, maybe more for you. ;-)


  8. tampa


    Sorry, I don't do business with guys who troll for customers, and give CYA calls.
  9. Whamo


    Tampa, you're such a grumpy old bastard...
  10. tampa


    ...and I love you to, Whammy
    #10     Nov 20, 2002