First off, I apologize for the “busyness” of this picture/chart, but there is so much to cover!
To get you up to speed, I would encourage you to read the last PUBLIC post regarding support and why I felt this area would provide a buying opportunity for nimble traders that had some cash available and wanted to enter the market. That post can be found HERE and today’s post will make much more sense if you read it first, trust me.
Okay, now that you have read that post. Notice that the very next day, March 21st, we had a major selloff into the support zone discussed. In the comments section of that post, I showed in real time where I purchased the market near the horizontal white line on this chart.
After Wednesday’s follow through to the downside was muted, and Friday held the same level and bounced, I added the green line of support to the chart. That Friday is noted by the first green arrow on the left and also shows how the 50-day simple moving average provided support for the market (as it almost always does on the first touch).
Monday March 27th (yellow arrow) saw a sell off that pierced the support (50-day moving average [white dashed line], 2016 lower uptrend line that ignored the election [red line]) noted but found support at a Fibonacci level near 231.60 SPY. The day opened very low, but was used as a buying opportunity by most as the market climbed all day and finished the day back above the red line, above the 50-day moving average, and back above the prior low’s marked by the green line.
The next two green arrows indicate days where price during the trading day as touched the 50-day moving average and bounced. March 28th and April 3rd. My previous PUBLIC post said price was nearing support, and support has held so far.
Looking at the highs from March 1st, we have made a low, bounced to a lower high than the March 1st high. Those lows and highs are marked by the start of the downsloping white trendlines. The yellow arrow marks a lower low made on March 27th. Near the red arrow, you can see that price has potentially made a lower high again on March 31st. Basic technical analysis of the stock market defines an uptrend as a series of higher highs and higher lows. The definition of a downtrend is lower highs and lower lows. Making a lower low than the March 27th low would lock in that scenario until a higher high was made again.
Dr. J’s Thoughts:
- Breaking the March 31st highs would be the first sign that the budding downtrend is failing and nimble traders may want to join the breakout trade with a BUY signal. Caveat: if price trades back below the upper falling white trendline on a daily closing basis, consider your BUY in danger and likely should be reconsidered.
- Achieving a daily close below the 50-day moving average (dashed white line) should be a cautionary sign that the budding downtrend is gaining momentum and support might get overwhelmed. I am 99.9% sure I will sell my recent purchase of SPY if this should occur. I have been setting stops daily on this position based upon other criteria too technical to share in this blog, but if a sale hasn’t already occurred prior to this event, closing under the 50-day would be a very, very strong signal for me to return to cash looking for a better opportunity to enter the market.
- I have a trading Mentor whose mantra is: “Nothing bad happens when price is above a rising 50-day moving average.” Well, as of this writing, price is above a rising 50-day moving average. Until that changes, maintain your upside bias in the market.