This is a 60 minute chart of the SPY. The circled area beneath the line is what I call the “bear trap” zone. The shaded area within the circle is representative of all the market action that took place below the 1,040 level on the S&P futures. 1,040, if you’ll remember, was the neckline of the much ballyhooed “head and shoulders” that technicians could not stop talking about. 1,040 was both the line in the sand area that stopped the flash crash and the area that supported the market on the January-February market pull in. To many technicians, this was a key area; however, when prices failed to stay below we got a nice bounce-back higher in the market.
Since making lows on July 1st, the market has consistently been making both higher highs and higher lows, while forging a new trendline higher (represented by the white, rising diagonal line on the chart above). So far today, this trendline provided the support necessary to stop the market’s drop, and at the moment we are basing right on top of what can be a pivotal indicator between Bull and Bear (breaking the trendline does not guarantee selling to the downside, it might just be an indicator that we need more time before moving higher). This afternoon I will be watching to see whether the market can give itself a little cushion above this line, or whether the pressure builds and selling ensues through this area.
The S&P held this trendline test today and carved out a comfortable cushion for the weekend. As selling pressure subsided and volume waned midday, the market proceeded to retake the 200-day moving average, at which point an aggressive rally ensued. Once again, the evaporation of volume signaled the all clear to buy stocks (see my thoughts about the lack of volume). It as if this market’s sellers are worn out.
Have a great weekend everyone!