Diary of a Financier

Pure technicals amidst government shutdown: SPY bottom formation

In Capital Markets on Thu 10 Oct 2013 at 22:02

Quick update on the $SPY after today’s big rally erased the week-to-date losses.

To followup on my last broad market note from Monday, SPY didn’t give me the tradable bounce I had expected as my highest probability outcome, but it did trade according to my bear case:

“In terms of downside risk, I’m watching for a breakdown at these right shoulder supports (immediate term @ $168 and longer term @ $167.2) with the 30/15mins bull divergences reversing.  Below here, support is all the way down at the longer term rising wedge’s trendline support >$164.”

Today’s gap-up from that $164-handle completes the short term Head & Shoulders bottom spotted in the 1-minute fractal.  Now, my focus for the immediate term is the 30-minute chart, wherein I find an immature H&S bottom forming.  I expect to see SPY slip lower and form right shoulder support ~$167 before a rally breaks-out over neckline resistance ($169.25-50):

SPY 1min/30min

SPY 1min/30min

Longer term, the small rising wedge within the larger, primary rising wedge in SPY’s daily chart has given me some more information.  This peek below trendline support has now been revealed as a big bear trap, known as a “throwunder bottom”:

SPY daily

SPY daily

There’s the most important takeaway from these developments: that maturation of SPY’s primary pattern suggests we expect a prolonged rally into year-end; maybe even a throwover top.

~~~~

As always, these are pure technicals I’m talking about.  Markets are always subject to exogenous shocks. Today, in particular, we’re lucky to have the [almost certain] bull catalyst of a resolution to the US government shutdown/debt ceiling/federal default standoff only days away. If left to their own devices (i.e. all else equal), these technical setups would play-out exactly as envisioned. In reality, there are larger inputs being dealt with here and now. If nothing happens down in Washington, I’ll likely get a perfect H&S bottom followthrough, and I’ll trade off it by accumulating equity exposure. If not, I’m well positioned for any outcome.

Our portfolio’s allocation remains at a 65/28/7 (stocks/bonds/cash) vs 60/40 benchmark. Beta clocks-in at 0.90 vs 0.76 benchmark and sigma 1.1 vs 0.6.

We’re clearly overweight risk, but we’ve held a good amount of cash to give us an opportunity to capitalize on this pullback–were things to have transpired as they have. Thus, we don’t feel pressured to buy for fear of missing a rally. That said, we’re in the midst of a dip with a bottom forming, we’re going to start buying tomorrow–either upon an intraday R shoulder bounce or a straight breakout about resistance. Thereafter, I plan on keeping more than half of our powder dry until the calendar gets closer to that 10/17 drop-dead date for a Treasury default (i.e. the 11th hour).

–Romeo

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  1. […] according to our plan, some buying has returned our portfolio’s allocation up to 68/28/4 (stocks/bonds/cash) vs 60/40 […]

  2. […] shyness in its first attempt to breach for a “throwover top” into YE, as I’ve expected.  Zooming-in to the 1-minute fractal, I see a short term complex H&S top with a bit of bear […]

  3. […] daily chart shows that classic throwover top I expected, as the priceaction sent a headfake upon breaking-out above its dual long term and short term […]

  4. […] that SPY has finally reentered its long term rising wedge, having traded up in a throwover top (as expected) since 10/2013.  If SPY rallies up to the $180-181 range–as suggested by the intraday […]

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