After a continued surge lower during the early part of the week, the market finally found some support as buyers started to cautiously step in at levels that hadn’t been significant since the months following last year’s flash crash. The million dollar question now is, are we pausing before a continued fall, or did we find another multimonth bottom here? The great thing about trading is, that we don’t have to guess, we can just wait and let the market show us what it will do.
Looking at a chart of the SPDRs S&P 500 trust etf (SPY), we can see what appears to be a rather wide bear flag forming at our current levels.
While the protypical flag formation is usually narrower, I would not necessarily discount this developing pattern just yet as it seems our current markets prefer to go big or go home. As I mentioned last week, look for volatility to begin to contract as we come to terms with our new price “neighborhood”. A quiet retracement into the middle of this week’s range would be constructive for the bulls, but if we print some fat red candles down to $112 next week, then look for a probe lower as the bears continue to test the dip buyers mettle.
A key signal that we have formed a productive bottom here would be a break AND HOLD above about $119-$120 on SPY. As we can see on a 15 minute chart, this was the level we ended last week at, and becomes a key gap area the bulls need to reclaim.
Watch this level into next week as it was the ceiling for the market this week and could become a key floor for price action if the bulls can get above it next week. If we drift lower, $115 should offer decent support. Another key level of support to watch into next week is the ascending trenline marking the higher pivot lows.
This continues to be a difficult period for swing trading, and my advice is to back off unless you are taking very quick (or day) trades, or are a position trader that likes the current levels of support on a particular equity.
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