SPY: Overbought Demand Testing Resistance (Technical Analysis)

Jul. 24, 2022 9:32 AM ETSPDR S&P 500 Trust ETF (SPY)15 Comments

Summary

  • This is a technical analysis article. You can see, on the daily chart below, that overbought demand is taking prices higher to test resistance levels.
  • We have identified these resistance levels with horizontal red lines on the daily chart and on the Point & Figure chart.
  • On the Point & Figure chart, you can see we have identified resistance near $404 and, with a bit of a reach, $412.
  • We have a preset sell alert that will be triggered at $407, as the bounce ends. However, we will wait for our chart signals to tell us when to sell.
  • We still have a short term buy signal targeting $404. We have a longer term sell signal at $407 targeting a retest of support at $364.
  • This idea was discussed in more depth with members of my private investing community, Daily Index Beaters. Learn More »

Businessman At Top Of Mountain Peak Holds Large Flag

DNY59

As you can see on the daily chart below, demand is driving the market (NYSEARCA:SPY) higher, testing resistance levels. Demand has reached overbought levels, but it can stay overbought for some time. However, in a bear market this becomes the first yellow flag waving at the top of the move up.

On the daily chart, you can see we have drawn a red price resistance line around $407. We have also preset a sell alert that Seeking Alpha will send out automatically when price triggers at that resistance level. Do we know if that is where the sell signals will appear on our chart? No. As always, we wait for the signals on the charts before we act. In our daily report to subscribers, we will identify these signals when they appear and here on our weekly update. However, we think the resistance at $407 is strong enough to stop this move up.

Not only is demand showing up as overbought on the signal at the bottom of the chart, but also you can see price going into the pink cloud of overhead resistance. The downward trend of this bearish pink cloud is, of course, created by this bear market move down in price. Can price break above the pink cloud? Of course, if it had some good news like the end of the war. As it is, the SPY is in a bear market downtrend, and no really good news in sight. We don't expect price to break above the pink cloud. We expect this move up to be stopped by resistance and head back down to retest $364. When? When our signals turn down on these charts.

The positive Fed narrative right now that is driving price higher goes like this: “The economy is already in recession. After a 75 basis point hike in July, the Fed will ease back to a 50 basis point hike in September.” We don’t buy that narrative. We think that only a drop in inflation will move the Fed off a September 75 basis point hike. We don’t see inflation coming down that quickly. Therefore, longer term, we are still bearish and expect a retest of $364 support, when we get the sell signals on the charts below. Regardless of our expectations, we act based on signals appearing on the charts. There are no sell signals yet. Our daily update of the SPY to subscribers will catch the first sell signals.

Here is the daily chart showing demand taking price higher. It also shows pink cloud resistance knocking price down after reaching $400 on Friday morning.

SPY after reaching $400

Demand Buy Signals Take Price Up (StocksInDemand.com)

NOTE: All the signals on the above chart are short term bullish except the pink cloud of resistance and the red arrow, long term downtrend, are bearish. Also bearish is our proprietary signal shown at the top of the chart. It is slowly moving lower, showing that the percentage of stocks in the Index that have our most important SID Buy Signal has dropped to 5.8%. Portfolio managers are having a tough time finding winners in the Index. They are selling their losers during this market bounce. How do I know? I spent my career on Wall St. working for these portfolio managers and showing them where the market was going.

Another chart we like to show is the Point & Figure chart below. It is very easy to see the support at $364 and the resistance at $404 and $412. This chart is noted for being accurate in identifying these levels.

SPY - Demand Testing Resistance Levels

Resistance at $404, Bottom $364 (StockCharts.com)

Conclusion

As you can see on the charts, the demand signals are all positive and taking price higher to test resistance levels. As soon as price hits resistance, it gets slapped down, especially in a bear market. You could see this happen on Friday, as soon as price hit $400, it was beaten down to retest support. This pattern will continue until the demand is exhausted and the signals on the above charts turn down. That is when this bounce is over and we go short. Don’t forget that the portfolio managers are selling into strength, especially during a bear market. The traders are buying the move higher as long as the signals are positive. Meanwhile, let’s enjoy the short term buy signals and this move up to test $404 or possibly $412.


Use our free, 30 day training program to become a successful trader or investor. Join us on Zoom to discuss your questions.

This article was written by

Tom Lloyd profile picture
6.73K Followers
Every day we look for index beaters for investing and trading.

Tom’s book "Successful Stock Signals for Traders and Portfolio Managers" is available on StockCharts.com and Amazon. The StocksInDemand.com system is designed to make money using a combined fundamental and technical grade for each stock. Tom received his MBA in Accounting from St. John's University, where he taught courses on the stock market. He marketed fundamental research, technical research and quantitative research to professional portfolio managers during his Wall St. career. 

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: We are not investment advisers and we never recommend stocks or securities. Nothing on this website, in our reports and emails or in our meetings is a recommendation to buy or sell any security. Options are especially risky and most options expire worthless. You need to do your own due diligence and consult with a professional financial advisor before acting on any information provided on this website or at our meetings. Our meetings and website are for educational purposes only. Any content sent to you is sent out as any newspaper or newsletter, is for educational purposes and never should be taken as a recommendation to buy or sell any security. The use of terms buy, sell or hold are not recommendations to buy sell or hold any security. They are used here strictly for educational purposes. Analysts price targets are educated guesses and can be wrong. Computer systems like ours, using analyst targets therefore can be wrong. Chart buy and sell signals can be wrong and are used by our system which can then be wrong. Therefore you must always do your own due diligence before buying or selling any stock discussed here. Past results may never be repeated again and are no indication of how well our SID score Buy signal will do in the future. We assume no liability for erroneous data or opinions you hear at our meetings and see on this website or its emails and reports. You use this website and our meetings at your own risk.

Recommended For You

Comments (15)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.