SPY Trend Interpretation After Several Up Days

Includes: IVV, SPY
by: StopAlerts

The news is still mostly negative, with an increase in banking concerns in China and only talk yet in Europe on resolving the Greece problem.

We have pointed out in client emails and articles on Seeking Alpha that the current price behavior has sufficient similarities to the beginning of the 2000 and 2008 crashes that extra caution is appropriate. Certainly, the macro backdrop is potentially dangerous to asset prices too.

That said, equity markets have been improving significantly in the past several days, with Treasuries also retreating (yields rising). as the fear factor reduces and optimism about Europe finding an exit from their credit problems.

Nonetheless, we are still in a period of "maybe yes" and "maybe no" as far as the price patterns go.

Consider these charts of SPY (the S&P 500 proxy ETF) (click image to enlarge):

In the top panel, the red line marks the price level 20% below the trailing 1-year high (the conventional bear market threshold). The gold line is the 200-day average. The blue horizontal lines mark the recent peak and trough, and the 40%, 50% and 60% retracement levels.

It shows the price touched the bear threshold twice, and pierced it one of those times, perhaps marking a double bottom of support.

The price is back up to the 50% retracement level for the third time, perhaps a triple top of resistance.

The moving average is tilted down and the price is below the average, both negative factors.

The middle panel plots the daily percentage change in price, as an indication of changing levels of volatility. You can see we are still in a heightened level of thrashing about, which makes a solid bet on which way things will break somewhat of a gamble.

The bottom panel plots the same 200-day average and 20% bear market threshold as the top panel, but also the price channel marking the 3-month high, low and mid-point for SPY. You can see that it closed today just below the mid-point of the 3-month range (the dotted blue line) -- still inconclusive.

There are other indicators, such as the popular MACD, that are rendering short-term buy signals, but with the macro backdrop and this range bound price, we still want more proof of a renewed up trend.

Disclosure: QVM has written far-out-of-the-money PUTs on SPY; and does not have positions in any other mentioned security as of the creation date of this article (October 12, 2011).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.