The S&P 500 ($SPX) enjoyed a faint recovery today, continuing its bounce off multiday support @ $177–a low it sniffed intraday yesterday. As the picture continues to develop, I wanted to consider the potential paths the market may pursue hereafter. The charts are rather resolute in their bearishness, but I’m looking for my next checkpoints and triggers to help manage the portfolio.
As I noted last night, SPY’s 1st support is now down at $174.5 (-2.6%), where its 50% Fibonacci retracement and trendline support of its LT rising wedge may eventually converge with its 200DMA. Right now, that $174.5 is my base case expectation for this pullback, which would amount to only a -5.6% drawdown.
SPY’s 15-minute chart shows a bear pennant with $177 flagpole support, which pattern morphed into an ascending triangle (reversal) after the strong rally into the close tonight. At best, this 15min setup will evolve into a bear flag within a larger H&S upon a rally tomorrow. At worst, it’s already prepared to breakdown.
The daily fractal shows 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 charts–not only will its 15min bear flag setup materialize, but also a longer-term, daily Head & Shoulders top will redouble the downward pressure (right shoulder ~$181 & neckline $177). Bear divergence is still burdening SPY, and although its daily indicators are pretty oversold (stochastic @ 13%K v 20%D), its weekly indicators have plenty of room to fall.
SPY’s 30min offers a nice verification of this expectation. The 30min stochastic shows a bit of overhead room to prolong this bounce tomorrow, which could place us at that ~$181 right shoulder resistance.
The FOMC’s January meeting ends tomorrow, followed by their press release in the afternoon. Anxiety has gotten the better of investors going into the last few Fed meetings–only to have the market’s drawdowns retraced immediately upon the Fed’s pronouncements. Such exogenous inputs can easily lay-to-waste single factor outputs like these technicals. Panicked buying after the Fed release could hit the airpocket overhead in SPY’s intraday fractals, where I see two gaps to fill up between $181.5-182.5 and $183.5-184.5.
That’s why I wait for confirmation signals in the charts before reacting. If SPY breaks-down immediately or shows weakness at the levels discussed herein–with the 15min bear flag and daily H&S top asserting themselves–then I’ll play more defense.
After some shuffling over the last few sessions, I sold our $SMP (+11%) and half of our $IWM into the close today, which brings the portfolio down under to my benchmark-weight target: currently 59/31/10 vs 60/40 benchmark (stocks/bonds/cash), with beta up at 0.79 vs 0.76 benchmark, and sigma 0.80 vs 0.59.