SPY appears to be sitting at a key level, the direction it takes from here should determine the trading action for the remainder of this month and into June.
Bearish case: We are in a well-defined downward channel and have yet to break out to the upside. With SPY sitting near the top of the channel, a rejection here should send us back to retest 380 lows and likely to 370s in the bottom of the channel. We may also be seeing a bearish flag forming on the higher timeframes. There are substantial resistance levels sitting above in the form of gaps and other pivots which buyers have struggled with repeatedly this year.
Bullish case: A large and obvious (probably too obvious) inverse H&S has formed since mid last week. This pattern has not yet confirmed, and would need to very soon, ideally in the next trading session. Some people have also pointed out a variety of bullish divergences, but I don't consider these very compelling, since they have failed repeatedly during the downtrend this year.
Overall thoughts: In the big picture SPY is not bullish and won't be for quite a while. In the short term, the main question is do we see a bull rally before making new lows, and if so, how far does it go? In my opinion, the max potential for any rally of that nature would be in the mid-420s or maybe as far as 430 for a stretch goal. There is another very substantial down gap in that area which will likely be difficult to overcome. Assuming we reach that level I expect sellers to show up and continue bringing the market down toward its ultimate bottom. Not sure exactly where that is, but quite a bit lower than we've gone so far.
In any case, the next trading session or two at most should give a clear idea of where we are heading over the next couple weeks.
Bearish case: We are in a well-defined downward channel and have yet to break out to the upside. With SPY sitting near the top of the channel, a rejection here should send us back to retest 380 lows and likely to 370s in the bottom of the channel. We may also be seeing a bearish flag forming on the higher timeframes. There are substantial resistance levels sitting above in the form of gaps and other pivots which buyers have struggled with repeatedly this year.
Bullish case: A large and obvious (probably too obvious) inverse H&S has formed since mid last week. This pattern has not yet confirmed, and would need to very soon, ideally in the next trading session. Some people have also pointed out a variety of bullish divergences, but I don't consider these very compelling, since they have failed repeatedly during the downtrend this year.
Overall thoughts: In the big picture SPY is not bullish and won't be for quite a while. In the short term, the main question is do we see a bull rally before making new lows, and if so, how far does it go? In my opinion, the max potential for any rally of that nature would be in the mid-420s or maybe as far as 430 for a stretch goal. There is another very substantial down gap in that area which will likely be difficult to overcome. Assuming we reach that level I expect sellers to show up and continue bringing the market down toward its ultimate bottom. Not sure exactly where that is, but quite a bit lower than we've gone so far.
In any case, the next trading session or two at most should give a clear idea of where we are heading over the next couple weeks.
Trade active:
I'm scaling in to short term (5.27) calls on dips leading up to FOMC minutes release at 2pm, 6 contracts so far. Technically we rejected off the top of the channel but I'm not buying it. Or rather I am, because that looks to me like a head fake. My ultimate target for this trade is 401 but I will be looking to sell the majority of contracts into strength from 399-400 if we reach that.
Trade closed: target reached:
I ended up with 9 contracts total. Sold 6 at 398 to lock profit and remaining 3 on a trailing stop which triggered somewhere around 399.