Our last market update nailed the bottom in SPY (and the catalysts, so it seems). I wanted to update the outlook as the market’s rally from its correction lows continues to wear on…
SPY’s daily chart shows the index having held 5 tests of its daily LT H&S top’s neckline support, confirming the ST bull divergence that manifest at its last pass. (You’ll notice that it’s not a classic H&S top, due to a high R shoulder – therefore weakening the signal strength.)
In this 5th bounce off that neckline support level, SPY not only cemented the aforementioned daily ST bull divergence, but more recently broke 3x bear divergence in a bull reversal (both stochastic & MFI).
That’s all very constructive. However, it’s important to note the headwinds in the immediate term. In that same daily chart, a ST resistance level is currently asserting itself (SPY @ 195) – a three-headed resistance level from the 50 DMA, 2x classic resistance, and a ST tilted fulcrum bottom’s R shoulder.
Short term (SPY @ 193 currently)
To establish a base case outlook at this junction, we turn to SPY’s 15-minute chart, with the following downside targets emboldened by ST 2x bear divergence…
2nd support @ 190.5 (-1.3%)
→ 1x support
3rd support @ 189.5 (-1.9%)
→ Resistance-cum-support to fill-down gap (2/17)
…thereafter, MFI bull divergence should set the table for a rally up to the real interim target: SPY’s daily support-cum-resistance level (SPY @ 200, +3.6% fm current).
The long term is far more important than these shorter-term oscillations. SPY’s weekly chart remains under the yoke of 3x bear divergence, with a bull reversal/bull divergence nowhere in sight. You have to go back to 2007-09 and 1999-2001 to find substantially similar setups.
As a result of this chart setup, technicals remain a bearish signal. Considering all the inputs from our multifactor model, we maintain that the LT outlook is NEUTRAL — for the first time in a long time. The market’s LT fate will still be dictated by the US consumer and (to a lesser extent) the Fed.