SPY Update

Last Friday I posted a pretty comprehensive QQQ update, tonight I'll add the SPY as I think there are some concepts discussed today and in the AAPL post that make sense in the SPY update.

First we'll work from the shortest timeframes and look at both how the trend and the intraday readings are both useful, then we'll work to longer timeframes which show more important underlying action (accumulation/distribution), the longer the timeframe, the more important the signal, however we often have to come back to the shorter timeframes for timing. Divergences almost always migrate, meaning if a 1 min divergence is strong enough, it will start to show up on the 2 min chart, if the 3 min is strong enough, it can show up on the 5 min chart. Just remember the longer the timeframe, the more important, so a 15 min divergence has much stronger implications of underlying action than a 5 min chart.

 Today's price moved above local resistance, often longs will wait for price confirmation (a breakout) before buying, I call that chasing and rather let the trade come to me. Today also filled a gap from Mat to the far left in yellow. The Doji star at the yellow arrow is a concept I have mentioned often, a bullish candlestick (in this case-thye can be bearish as well), with heavy volume are often reversals and occur on all timeframes. The reversal has no target implication, it can be a day, a month, or a half a day with only an open in the reversed direction.

Also note volume falling off as we had a "Breakout" today, this isn't bullish behavior to see light and diminishing volume in to higher prices and especially not on a move above resistance.

 Traders still use the 50-bar 5 min moving average as an intraday stop, here at the white box you can see the break of that moving average triggered some stops as volume was about double compared to volume before it-this has been used since the late 1990's, that's how stuck in their ways Technical traders are. Also note the volume pick up as intraday support levels were broken at the end of the day. Traders view support and resistance as EXACT levels, but if you understand the human psychology behind support and resistance, you'll know they are best viewed as areas. You never want a stop at an exact level like this as anyone can see it if you place it with your broker (I prefer mental stops) and it's bound to end up in the same area as everyone else's stop, an easy target for market makers/specialists looking to generate volume rebate income.

 SPY 1 min trend shows a local negative divergence around July 1 as price is about the same, but 3C is lower, we then see last Thursday's accumulation mentioned and a longer relative negative divergence from June 31 to today as price was higher today than June 31, but 3C lower.

 The same 1 min chart used on an intraday basis, a small positive divergence late Friday sending the market higher today, but 3 negative divergences at the 3 reaction tops today, ending with a leading neg. divergence as 3C makes a new low and price hasn't yet.

 2 min trend-We see the same distribution on July 1 and the same relative negative between the 26th of June at lower prices and today's highs at much higher prices. We can also see Thursday's accumulation from last week, I think GS had a lot to do with this, not the stock, the company itself.

 The 2 min chart on an intraday basis... We see a neg. divergence at the highs today and a leading negative around the 3 p.m. highs, compare price at 3 p.m. and 10:15 a.m. which is about the same, yet 3C is much lower (3C in the red box vs the orange box). If 3C was at the same level we would have price/trend confirmation, it is not, it's a leading neg. divergence.

 SPY 5 min trend shows from left to right, accumulation at the July 12 lows and a negative around the 19th sending price lower, 3C didn't move lower making a leading positive divergence and the area around July 23-25 is accumulated, price moves up and is distributed again at the 30th area and Friday and today see even lower 3C readings at higher prices-a leading negative divergence.

 5 min chart intraday, the 3 reaction highs today all see successively lower 3C readings, on this chart the last one in the red box is leading negative as it hits new 3C lows.

The 15 min chart with a relative negative divergence, SPY was higher today, 3C should have been higher if the price/trend was to be confirmed, it wasn't.

 Here on the daily SPY chart we have a downtrend from May 1 and a bear pennant, technical traders expected the bear pennant to do what hundreds of Technical Analysis books have taught for almost 100 years and follow the red arrows with a break below the pennant/triangle and a new leg down roughly as large as the first leg down, instead that was a head fake move which we saw positive divergences and were able to buy long positions at great prices with little risk.

Note the 4 green arrows marking resistance/reaction tops and the last white arrow from today and compare this trend to the 60 min chart below.

The 60 min chart shows clear distribution at the March-May 1 highs, this is where we built our core short positions. 3C moves lower with price, confirming the downtrend until we reach the bear pennant (the yellow pennant is seen here in May). We already knew there were positive divergences there and expected a head fake so letting the trade come to us was easy, there was accumulation at the June 6 lows where many of us entered long hedging positions. The first moves in 3C confirm the trend until a small neg. divergence between mid and late June, the next divergence was worse from late June to mid-July, the mid-July to late July divergence was even more negative, not only because 3C was lower, but because price was higher making the divergence that much bigger, finally the late July to present divergence is even worse.

In 3C vernacular, what this would indicate is the process of distribution, as mentioned, Institutional positions can't be closed in a few days or a single trade like we can, they are often tens of millions of shares so they are sold in to higher prices until the selling is done and then they often sell short for the next trend. As selling and selling short both come across the tape as a "sell", there's no way to differentiate between selling and short selling, except short selling is often seen when the divergence is at its worst or leading negative.