Diary of a Financier

Intraday update: SPY’s jitters becoming manifest in charts, Dow warns of top

In Capital Markets on Wed 23 Oct 2013 at 12:43

After breaking-out to new highs yesterday, as expected, $SPY (-0.7% @ $174.2) has come back down to test resistance-cum-support from its dual rising wedge trendlines.  The intraday technicals have prompted me to take my finger off the buy button, because the setup has grown more precarious.

Overnight, the European trading session reminded world markets of yesteryear’s Eurocrisis, as the ECB laid-out its plan for 2014’s stress tests of their banking system.  That’s the apparent attribution for the 60-75bp pullback we’ve seen in US equity markets so far today.

As I noted earlier this morning and already herein, SPY is now fighting to hold resistance-cum-support in its daily fractal, where we’ve already witnessed the early stages of a bull reversal in indicators–specifically MACD has shattered 2x bear divergence that dates back 5 months.SPY daily/15min/1min

Today’s pullback has started to develop a Head & Shoulders top in the 15-minute chart, which still exhibits 2-3x bear divergence of its own.  That H&S’s neckline support lies at $174-even, below which 2nd support is at $173.5 before an airpocket would fill the 10/21 gap down to $173.

The completion of that 15min pattern requires a rally up to right shoulder resistance ~$174.75.  In brilliant coordination, the 1-minute fractal shows a short term, complex H&S bottom with 2x bull divergence.  I expect this 1min pattern to complete its classic breakout up to resistance right at that $174.75 target today.  At that point, there’s an outside chance that SPY fills the overnight gap >$175.4, but the higher probability outcome suggests the longer-term, 15min H&S top should overrule, leading SPY back down to $174.

In addition, the Dow ($DJIA) is at right shoulder resistance (~15,500) of a complex H&S top in its daily fractal.  As if that bearish pattern weren’t bad enough, DJIA shows 2x bear divergence and is on the verge of a death cross (50DMA @ 15,153 vs 200DMA @ 14,865).  A slide down to neckline support ~14,700 would be the sum of all fears:

DJIA daily

DJIA daily

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I’m left continually reminding myself that we’re still in a bull market, and you never trade against that overarching trend.  Like I already said, we’re sitting still, holding our portfolio as is.  A breakdown at SPY’s $174 neckline support is the completion of that 15min H&S pattern, which is the tradable signal through the noise.  Only then do I foresee derisking.

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Update (16:00 est):
SPY closed @ 174.57, fading after having hit R shoulder resistance >174.75 late this afternoon; consequently, the entire bearish setup discussed herein remain intact & to be deal with tomorrow, unless SPY immediately fills the gap up tomorrow.

–Romeo

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