SPY Double-Bottom Was No Surprise

The S&P 500 ETF (SPY) as well as the index itself moved higher last week, surprising more than a few traders and investors. But if you were watching the technical analysis closely, it should not have come as a shock to you. Let’s take a look.

SPY at Support 

In the chart of SPY below, you can see the ETF had previously come down to around the $362 level in mid-June. On Friday, Sept. 30, the ETF closed below that level. But what happened the following Monday should not have been a surprise. That potential support level due to a previous pivot low from June held and kept the ETF from moving lower (double-bottom). That’s because support, like resistance, has a better chance than not to keep the underlying from moving through that level.

Support

As a trader, if you jumped the gun in this case and entered a bearish position before a second daily bearish candle formed, you were most likely not happy or profitable. Generally, two consecutive candles below support constitute a break of support. Here we only had one. This did not mean the ETF was going to reverse and move aggressively higher on Monday and Tuesday. That might have been a little bit of a shock, but bearish strategies on the ETF should not have been considered until the confirmation candle.

Finally

Clearly, the way the market moves is not just based on technical analysis. There are outside influences that can trump technicals. But if you ask yourself what has a better chance of happening before considering a strategy, you are much more likely to be profitable. In this case, the SPY had a better chance of moving higher than lower.

John Kmiecik, Market Taker Mentoring


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