SPY Continues Trapping Bulls / Bears; Rally Traps Bears NextPrimary Chart: S&P 500 represented by AMEX:SPY (SPDR S&P 500 ETF trust, an ETF traded on ARCA and NYSE)
SUMMARY
US equity markets may continue to trap bears and bulls alike in the coming weeks and months on the short-term to intermediate-term timeframes.
SPY / SPX may rally in the coming days and weeks into April 2023. Such a rally makes sense from a technical viewpoint but would be considered irrational given the broader macro environment. But consider how many irrational and unexpected price swings have occurred since this bear-market began in early 2022.
The price range in SPY has been compressing over time since the October 2022 lows. The anchored VWAPs (discussed in detail below) confirm this compression and tightening of the range.
Price is finding support at the 3900 SPX / 390 SPY level. If this does not hold as support (or if it breaks and does not quickly reclaim), the entire thesis of a rally is invalidated.
Conservative targets begin at $398-$399 ($4000 SPX). The list of targets appear below:
1. 398.48 SPY / 4000 SPX (most conservative)
2. 401.14 SPY (conservative)
3. 404.42 SPY (conservative)
4. 407.70 SPY (moderately aggressive)
5. 409.25 SPY (moderately aggressive)
It is easy to come up with bearish stories about how price will run in a straight line to new lows. Perhaps that may happen this spring. But perhaps not. The crash-right-now scenario seems far too easy and predictable without sufficient pain (max pain theory) for bears and bulls alike.
Instead, price may continue to chop within its ever-tightening range. A few more traps and tricks may lie ahead before a major trend move can occur. The following SPY charts show a reasonable argument and analysis for higher SPY prices the coming few weeks. Keep in mind, this is a shorter-term view only lasting only 2-10 weeks. Whether all-time highs will be reached before new bear market lows are achieved seems unlikely, but markets can do whatever they want. It's helped me to realize that anything is always possible in markets no matter how irrational. And it doesn't make sense to spend a lot of time thinking about which will happen first: new all-time highs or new bear-market lows. Why? Because it doesn't matter and it probably can't be known with even the best Elliott-wave counts or the most extensive macro deep dives.
Turning to what the charts are showing us currently, one can see that US equity markets continue to trap bulls and bears in difficult whipsaws that defeat longer-term positioning in both directions. Bulls were trapped in late January 2023 and early February 2023 when SPY rallied convincingly above 410 (4100 SPX) to reach nearly 420 (4200 SPX). Many said that the lows were final and that the market was traveling back to new all-time highs. The macro and monetary-policy environment has suggested caution as to forming optimistic, inflexible bullish biases about reaching new all-time highs with a new uptrend. In any event, few strategies have worked in this price environment. One famous trader discussed in Jack Schwager's Market Wizards series said recently he was down somewhat this year on the few positions he has taken, and that this market has been extremely difficult. In general, from his public statements, one can glean this particular "market wizard" has been staying largely away from investing and trading (a trading decision in itself which requires great discipline) given that his breakout-trading strategy does not work in this type of market.
Given the whipsaw and chop on a daily and weekly basis, shorter-term strategies between major levels may have the most success. As one veteran trader once said, trading from the edge in chop will give you an edge. The edge has been difficult to define, however. For example, in early February 2023, SPY / SPX pushed deviously above December 2022 highs. The December 2022 highs appeared to be the chop-range's edge. But price pushed above that in a tricky way that trapped many bulls. Bears have had their share of pain too, as price has broken below key levels only to reverse higher. For instance, in December 2022, after the FOMC presser that killed the rally, price fell into the 375-385 SPY range only to fail to follow through to the downside as many market players may have expected. Similar shorter-time frame failed breakdowns have also appeared on January 19, February 9-10 and February 22, 2023.
The anchored VWAPs confirm what might be inferred from the choppy price action alone. Supplementary Chart A below shows several key VWAPs anchored to major turning points since the all-time high in SPY / SPX on January 4, 2022. Notice how they show price compression as VWAPs from major highs drift downward and VWAPs from major lows drift upward with price caught in the middle except for the trappy breals above and below that failed.
Supplementary Chart A.1
In a way, the VWAP from the October 2022 low and the VWAP from the January 2022 high have together formed the boundary for price action since the October 2022 lows. The next chart, Supplementary Chart A.2, shows just these two anchored VWAPs to allow a better visualization of this phenomenon (compression):
Supplementary Chart A.2
Next, consider the Fibonacci levels shown on Supplementary Chart C below. This shows where price could rally in the coming days and weeks. The shorter-term Fibonacci retracements were drawn from the intraday low on Friday, March 9, 2023, which may not be the low of this particular swing. If this low changes, SquishTrade may likely provide an update on this.
Supplementary Chart B
Considering Supplementary Chart B further, the most reasonable targets are also the closest resistance areas under Fibonacci analysis. The most obvious target is the $398.48 Fibonacci level, which is the .382 retracement of the entire bear market decline (retracements drawn from the all-time high in January 2022 to the current bear-market low in October 2022). This level is approximately 4000 on SPX, a key psychological level and an important positioning level. None of the upside shown on any of SquishTrade's charts can occur without a decisive recovery above this area.
Assuming the 390 SPY area holds as support next week, the key Fibonacci areas to watch as targets and resistance are the 50% and 61.8% retracements of the recent swing high to low (starting at February 2, 2023). This gives us conservative targets for a rally of $401.14, $404.42, and $407.70. If a lower low is made in the next few days on this decline, then these Fibonacci retracements will be revised somewhat lower.
The next target is the VWAP from the all-time high at $409.25 today. This shows a gentle decline over time, so in the coming days it may be marginally lower or higher depending on price direction. Reclaiming this anchored VWAP would require a substantial move in the face of hostile macro and rate environment.
So SquishTrade will refrain from extensive discussion of targets above this January 2022 VWAP at 409.25 (4100 SPX) and mention them merely as possibilities to watch. In other words, these targets remain inchoate and tenuous until lower levels reclaim first. In any case, the Fibonacci analysis on Supplementary Chart B above reveals confluence around the August 2022 peaks. This shows $429.61 SPY as a major Fibonacci level, i.e., the .618 retracement of the entire bear market high to low range. This coincides with the August 2022 peaks at $431 as well as the 1.272 external retracement (or extension) at $425.87.
SquishTrade's analysis does not assert definitively that this $425-$431 area will be reached as that would be premature. No confidence on a technical basis can exist as to whether can zone will be reached until price can reclaim critical lower levels first. But it seems plausible technically speaking (and setting aside macro biases for purposes of this analysis). That would cause a great deal of market pain and suck in a lot of investors and bulls into the chase of a new bull / primary uptrend. For now, this post's analysis is limited to a call for SPY to move higher into the more conservative targets discussed above ($398, $401, 404, 407, $409). Again, these lower price levels must be reclaimed first before considering any SPY / SPX targets above $410 SPY / 4100 SPX. And this author prefers to take price action a bit more granularly, i.e., level by level, to avoid forming rigid biases that work against one's ability to read price action objectively, and to resist getting too far ahead the present action and the charts as they appear here and now, which provide valuable information daily that is better than any forecaster on Wall Street can provide.
Lastly, consider the final two supplementary charts below showing (1) gap fill areas just above $420 (SPX 4200) and (2) the measured-move from October 13, 2022. This could result in a move to $437.02. This would seem outrageous and irrational given the macro environment, right? But how many times this year have equities acted outrageous and irrational? Perhaps even this technical area can be reached before the great slide begins in earnest. Flows from positioning (CTAs) and options can be affected by a number of things that don't involve the terminal rate or inflation prints. In any event, look at how price is finding support at the $389-$391 area (shown by a blue rectangle on the Primary Chart and the supplementary charts. As long as this holds, price can move higher into April 2023.
Supplementary Chart C
Supplementary Chart D
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
