S&P 500 Technical Analysis: Weekly Update
Written by Lawrence on November 8, 2009
It was a clear win for the bulls over the past week as the market rocketed more than 3% after a shaky start on Monday. But was it really a win for the bulls? In this weekly update on the S&P 500 index (as depicted by SPY), we will examine the technical action that took place in the previous week and discuss the possible trade setups going forward.
As shown in the daily chart above, SPY got off to a shaky start on Monday and registered an intraday low of 103.10. Since then, the ETF rocketed meaningfully higher over the next few days to end off the week at 107.13. While the action looks promising in the near term, the bigger technical picture warrants a questionable case for the bulls. The upside in the past week has relieved some of the oversold conditions of the intense decline which began in mid-Oct and has brought the ETF to a favorable position for the bears to reload their shorts. The move upwards is tracing out a potential right shoulder in a multi-month head-and-shoulders (H & S) pattern in the SPY – a bearish technical pattern, which upon completion, suggests significant downside for the market in the intermediate term. It is likely that SPY will stall at current levels (107-108, in line with the “left shoulder” of the H & S pattern) while the bulls and bears wrestle to establish a more committed move in the near future – up or down. Given that the recent rally took place on declining volume, it will not be a stretch to think that the next significant move is to the DOWNSIDE.
However, a completion of the H & S pattern will only take place when SPY breaks below the neckline of the pattern at about 102-103. While it is still too early to take on significant short positions at this point, it would be wise for traders to carefully monitor their existing long positions and reduce long exposure if they have not already done so.
In the coning week, we will be highlighting some short side setups in indivudual stocks and ETFs. Stay tuned – it will be an interesing week ahead.
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