SPY: Walking a fine line

Its been a while since I have done a comprehensive written post, mostly because I don't generally have much to talk about.

But buckle up buttercups because its going to be a long one. I got lots to talk about.


Everyone's favourite little SPY. Or, as I like to call it as of this year, this abomination of man. Its up to some serious nonsense currently. But before we get into that, let's just recap on some of my most recent video ideas.

Monthly Outlook

My bias is Bullish.
Mostly because SPY only goes up, but also because we have a bullish gap probability on the month (as well as the average October return being 1.54%) and we are currently over the bullish conditional (being over which increases the probability of hitting high targets).

Let's just recap the monthly with the Seasonally adjusted monthly levels for SPY:



We can see we are clearly overly the bullish threshold, with gap probability biased towards the upside.

Now let's take a closer look at the statistics from recent. Since fake crosses are a thing and SPY has been known to cross on fakeouts:



Now these backtest results are slightly skewed because:

a) These levels are based on October, while how pinescript does the backtest is just each month of recent. The actual backtest results isolated for October I have shared with you in my previous October outlook, but this just gives you a feel for kind of the follow through, we can see that there is better follow through on bearish breaks than bullish breaks, but 15% of bullish crosses fail.

But:

b) The bull market trendline is well in intact, albeit it has not been tested recently (you can see this in the main chart but I will reproduce here for convenience):


c) Our last test of the BMTL (my new abbreviation for Bull market trend line) was on Sept 2nd, with an average of 21 days between re-tests. We are now pushing at 26 days since our last re-test.

This is all fine and dandy, but SPY is showing some trend fatigue and some aeras of concern. We can see the trend fatigue from the PA itself, but here are some quantiative measures of SPY's actual trend (I will add the results for QQQ s well):



I have listed on the daily and hourly. The results are not ideal. The 2 biggest concerns here are:

a) In both cases, entropy is very high, especially on the hourly timeframe (> 0.70). As Entropy approaches 0.75 the probability of a transition / change increases. Not only that, but high entropy causes chaotic price action. Entropy can be seen as a kind of measurement of chaos. The higher the number (the closer to 1) the more chaotic the system is. While it does show as improving, the value is incredibly elevated, especially on the hourly timeframe. This is critical because this greatly increases trader's risk exposure, especially in day trading (the fake breakdown we saw and then reclaim is an example of high entropy and chaos). It urges caution with positions in either direction.

c) The next big red flag is the fleeting volume. This has been consistently visible over the past 2 weeks. What this means is that as price goes up, Volume was not increasing (i.e. there really are no new buyers being enticed). As of this week, its actually fleeting Volume, which means as price goes up, Volume declines. Flat volume are signs of stable trends and can signal that price discovery and harmony has been met. However, declining volume in the face of upward (or even downward) movement raises concerns of trend fatigue / exhaustion.

The rest of the data is so-so, with the exception of QQQ showing structural weakness (i.e. the uptrend is showing signs of faltering).

In general, these metrics would lead one to believe that we are at trend fatigue but is important to understand that trend fatigue does not always = trend correction or selling. Trend fatigue can manifest in different ways, of course selling/pullback is one of them, but other ways are consolidation and more volatile and chaotic price action. We can't be sure which outcome it will do (selling/ consolidation / volatility) but we can be sure that risk exposure will be substantially augmented when you are trading fatigued trends.

But wait, there's more!

In addition to SPY and QQQ's fatigued states, we are seeing increasingly looming fatigue in the market, most notably via chart patterns.

For those who have followed me, you know I love Bulkowski patterns. I have even trained my own Bulkowski model on the top 130 patterns (65 bullish and 65 bearish).

To put it to good use, I created a screener that would screen the top tickers of the indices and have started tracking this. Here are some interesting results:

SPY:


Between yesterday and today, there has been a 3.6% increase in bearish patterns. QQQ slight increase but mostly unremarkable:



Not a significant increase but creeping up with a huge portion of the holdings displaying bearish chart patterns.

Shorter timeframe

With the government shutdown still in effect, the market hasn't had the cycles of news release and the semblance of reality checks it gets from time to time. Perhaps that can be used as the excuse of why SPY broke down from an incredibly bearish wedge, only to reclaim it today:



The government shut down can also account for the increase in entropy. The market has been left "in the dark" and "blinded to reality checks". Though these reality checks tend to be short lived they still do have an initial impact and have helped us pullback in the past.

There is no end in sight for the shut down and thus the market is flying blind and just being left to its own devices.

As such, except the chaos to continue.

But in the shorter timeframe (i.e. into end of week), here are my thoughts and where we currently stand now:



SPY has snagged PL1 on the week and bounced there. We are now at the "Most likely high target" (orange line) with the next anticipated move to 675 (PH1).
If we surpass that, the anticipation is continuation up to 678 on the week (PH2).

There are no outstanding high probability downside targets.

There are some noteworthy things, such as:

a) SPY printed a bearish Heikin Ashi setup on the Daily


Though this is likely to be invalidated.
With a move a bit higher into the end of this week and a bit higher into next week, we would theoretically make a bearish HA setup on the Weekly:



Lots of bearish stuff showing up though its always shaken off and ignored.

The reality is the market is walking a fine line with this elated exuberance that doesn't really make sense if you consider the underlying economic instability. But alas, irrational markets are a hallmark I know quite well. Though since my nascence into the tradingsphere in 2018, this is the most irrational market I have ever traded in my life!


TLDR
As of now, looking for SPY to continue up to 675 and if that is exceeded, next step is 678.19.
Market is walking on a tightrope and may lose its footing at any moment, so be prepared and position accordingly.


As always, not advice and Safe trades!