Twelve days ago the $SPY made its second close below the advancing 200 day moving average. Amateur technicians spoke in unison about the bearishness of this event. We objectively noted that the direction of a key moving average is more important than one or two closes above or below it. From that intraday low to today’s midday high, the $SPY has rallied just over 7%. This rally has just moved beyond a 61.8% retracement of the April high to the June low, anything less than a (approx 2/3) move is considered a retracement and not a reversal. Could this be resistance? Of course, it might be, but right now there is no evidence it is a place where sellers are gaining the upper hand.
Another important moving average is the 50 day moving average, I bet you have it on your chart. The majority of traders who look at charts do. The red moving average on the chart on the left is the 50 dma. The SPY price is above that moving average, but notice the direction of it, it is declining this gives us reason to be suspicious about whether the market can hold onto its gains for more than a day or two. But until we see prices actually reverse the odds don’t seem good for short sales.
As I often point out, moving averages should not be used as a stand alone tool, but they give us a great reference point to compare price to. We want to objectively observe how price acts around those levels on shorter term timeframes. The short ter term timeframes are still bullish. You could make an arguement that the prices are “extended” and “due for a pullback” but that isn’t evidence (price) based analysis. Price is objective, we often are not.
What if the market continues to move higher and it does go on to meet the bullish objective of approximately 141 from the inverted head and shoulders pattern (outlined in purple)? Stranger things have happened.. The correct approach for this market is to be cautiously optimistic and be ready to move aside when momentum wanes. Protect your gains and listen to price action only, did reading any news about Greece help or hurt you? Only Price Pays!