Diary of a Financier

Putting the SPY on short term watch, awaiting confirmation

In Capital Markets on Tue 8 Jan 2013 at 20:36

Just a quick entry to check in, since there’s been little of note so far this week. This afternoon, I sent out a warning (of sorts), which concerned the 5-day, complex Head & Shoulders developing within the S&P 500 (SPX).

Since SPX gapped up on January 2 in the wake of the fiscal cliff mini-deal, this pattern is like an island floating above everything else on the 30-minute chart. The construction is tilted, with a complex, 3-pronged head:

SPY 30-min

SPY 30-min

I will not react to this development unless the pattern is completed, which would include a rally up from this neckline support (~$145.00) to right shoulder resistance <$146.00, followed by a breakdown below the neckline. The movement in between those bands is minutia, but the breakdown could be meaningful, as SPY would fill a gap down to $142 (-2.5%). What compounds my concern about this pattern is that the so-called island is resting atop a symmetrical wedge on the SPY daily chart–a potential bull trap:

SPY daily

SPY daily

I am one of those bulls, so I don’t want to get fooled by this false breakout. Remember, there’s still that pesky daily and weekly bear divergence that SPY needs to shatter in order to confirm a longer term bull reversal. As they stand today, SPY’s indicators are approaching a test of that divergence with the daily stochastic overbought (weekly still trending bullishly ~75% and rising), so a pullback wouldn’t be unprecedented–albeit a fringe scenario as I’m more focused on the intermediate trend higher.

~~~~

It’s always good to verify a particular chart reading with other indices or assets. By looking for consistency across markets, I can usually confirm whether or not a pattern (like this H&S) is a false signal or a going concern. For example, much like SPY, QQQ is in its own hotzone, dancing around a potential right shoulder resistance of a significant H&S top in its daily fractal. In addition, the 10y Treasury Yield (TNX) is also an island hovering above a support level ~1.85, below which lies an airpocket down to 1.80. I still consider 2.40 to be an attainable target in the longer term, but a hiccup down to 1.80 is becoming more likely in the near term.

This is how technical analysis operates; charts morph, trends change, and new patterns emerge as everything evolves. One thing is for certain: there’s a small hurdle here were risk assets to maintain their rally. I’m sitting still until I get the aforementioned confirmation–else the construction fail and morph into something new.

–Romeo

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