Bernie Schaeffer
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After Two-Day Swoon, Where Will SPY Find Support?

Posted By: Bernie Schaeffer 11/09/2012

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Eyeing the Historically Significant 400-Day Moving Average
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Trader Comments

Bernie Schaeffer:

The 3-1/2% post-election decline has placed the SPDR S&P 500 ETF (SPY)  in close proximity to 2 levels of credible support at Thursday's close at $138.02:

  1. Its 200-day moving average  ($138.74)
  2. A 10% year-to-date gain ($138.05)

The 200-day moving average is a very common component of the toolbox of even rank beginners at technical analysis and any such popular indicator is always suspect under the banner of "A trading edge cannot emanate from a tool in common use". But at the same time, the very popularity of the 200-day moving average as a measure of the health of the market attracts the attention of even the most sophisticated traders and they make it their business to have the 200-day on their radar. And you've seen time and again in our commentaries how levels associated with round number year-to-date gains and losses (such as +10%) can be uncanny in acting as resistance on rallies and support on pullbacks.

The accompanying chart displays SPY since 2004 with its 200-day moving average (in red) as well as its 400-day moving average (in gold). And you will note that while the 200-day has had some significance as support or resistance, pullbacks have found support at the 400-day with near-astonishing regularity. I see 2 major reasons why the 400-day moving average is more effective than the 200-day over the longer-term:

  1. The 400-day is a more stable series than the 200-day, without encompassing so much data as to be glacial in its responsiveness.
  2. The 400-day is not on the radar of most technicians, who -- especially in these days of short-term trading and shortened attention spans -- tend to gravitate to shorter-term moving averages. On the other hand, the 200-day moving average is likely to be followed even by the most "fundamental" of analysts.

You can also see from the chart that there were quite a few SPY pullbacks over this 8-year period that penetrated the 200-day but were contained at the 400-day. In its simplest terms, this suggests investors should not consider radically reducing or eliminating their stock market exposure on a 200-day break if the 400-day has remained intact. And ditto for traders who are looking to short the market (using SPY as their proxy).

So if in fact SPY does not find support at Thursday's close at the intersection of its 200-day moving average and +10% year-to-date levels, there remains an area of potentially powerful support at its 400-day moving average that investors and traders would be wise to heed before taking a more bearish stance on the market. As of Thursday's close the SPY's 400-day was sitting at $132.06, 6-points (or about 5%) below Thursday's close. Note the 400-day is rising at a very modest pace, so if the SPY continues to march lower you should regularly check current 400-day values.

Further credence from activity in the options market for Thursday's close as a potential bottom emanates from our additional chart of the S&P 500 Index (SPX) in 2012. The dates marked with an "X" indicate the 7 instances this year (excluding expiration-related activity) in which total daily SPX option volume has exceeded 1 million contracts. There were two "pairs" of such instances -- September 13 and 14 and November 7 and 8 (Wednesday and Thursday of this week) -- in which the million mark in options volume was exceeded in two consecutive sessions. What I find most interesting is that with the exception of the instance in February, the remaining three of these instances (counting the September "pair" just once) occurred at major inflection points in the market. This makes sense from a sentiment perspective, as climactic levels of option volume are often correlated with the extremes in fear that characterize market bottoms and the extremes in greed that characterize market tops.

There are simply not enough data points reflected on this SPX chart from which to base a reliable indicator, nor is there any statistical back-up for the premise that "pairs" of unusually high SPX option volume have more significance than single-day readings. But when the climactic SPX options volume this week is combined with Thursday's pullback to credible support levels (with an additional layer of support not too far below Thursday's close) this information should at the very least give you pause before you abandon your stock portfolio or attempt to short the market.

Tony Venosa:

In addition to the levels Bernie mentioned above, the low for the SPY this morning was $137.55, which matches the 50 percent Fibonacci retracement level for the June-September up move.

Ryan Detrick:

Speaking of volume, on Wednesday the SPY had its highest daily volume since May.  Then regarding the 200-day MA, it broke this level back in June for three days before sparking a surprise summer rally.  What stood out to me about that break was we read about it everywhere.  Fast forward to today and once again I'm hearing a lot of talk about how the 200-day MA gave way and how this could be bearish.  Sure could be, but if price firms up soon - it could simply be another example of bears getting too worked up while the market is forming a bottom.

Joe Bell:

With the election in the rearview mirror, many investors are becoming increasingly worried about the fiscal cliff and how higher taxes and spending cuts might affect the economy as a whole.  This uncertainty is nothing new, but is getting extra attention now that election is over.  Looking at a long-term chart like this can be very useful and powerful when so many participants are caught up in the daily news.

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