After Two-Day Swoon, Where Will SPY Find Support?
Click to Expand
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:
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:
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.
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.
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.
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.
The Case for Big Moves in IWM and QQQ
Why OIH Is Finding Key Support at $52
A Phenomenon Worth Watching in 10-Year Yields
Why Bulls Need to Watch SPX 1,880
Global X Social Media ETF (SOCL) Tests Key Chart Levels
Recent XIV Action May Bode Well for Bulls
Why LinkedIn's Trendline Breach Could Be a Buy Signal
9 Levels to Watch for Apple Inc.
Keep an Eye on Twitter Around $40
Has SPDR Gold Trust Found a Short-Term Floor?
Why We Probably Haven't Seen the Last of RUT 1,100
Another Reason to Watch Dow 15,000
Why TLT Traders Should Heed Round-Number Returns
For Bonds, the Bottom Could Soon Fall Out
SPDR Gold Trust Rally Runs Into Resistance
Mid-Caps Nearing a Triple of March 2009 Lows
'Huge' Doesn't Begin to Describe S&P 1,550
Grading Stocks, Bonds, and Gold
Apple's One-Year Return Swings Into the Red
Is LinkedIn Poised for a Breakout?
Why $500 is the Apple Level to Watch Right Now
Fiscal-Cliff Whispers Spark SPX Fits and Starts
Time to Short Oil-Services Stocks?
Why SPY Might Rally 5% Into Thanksgiving
A Breakout No One is Talking About
Options Indicator Flashes Potential Buy Signal
Ways to Hedge on Apple (AAPL) Before Earnings
LinkedIn: The Uncommon Trendline We're Watching
Two Speed Bumps for Builders
Does Coal Have Farther to Fall?
LinkedIn Looks to Challenge Looming Resistance
A Post-Earnings Reality Check on General Electric
A Red Flag for Euro Shorts
Two Valuable Investing Lessons from the Homebuilders ETF
Is Bank of America Poised for Another Leg Lower?
How Long Can SPY, GLD, and TLT Stay In Sync?
The New VIX Resistance Level to Watch
Why 2,200 Matters for the EURO STOXX 50
The SPDR Gold Trust ETF (GLD) Languishes Below a Key Trendline
Two Takes on Research In Motion: Daily
Two Takes on Research In Motion: Intraday
SPDR Gold Trust Stares Down a Technical Sticking Point
A Hidden Resistance Level for JPMorgan Chase
Featured Partners: AOL DailyFinance
© 2014 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242
Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email: email@example.com
All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.
Market Data provided by QuoteMedia.com | Data delayed 15-20 minutes unless otherwise indicated.