Downtrend in SPY Through Year End - July 2013

Intermediate Downtrend in SPY Could Last into 2014

The chart above shows the bull market in the SPY beginning March 2009. By looking at the Elliot Wave counts in the context of the long term trend channel, traders can develop a "feeling" for the maturity of the trends in play. 

Brief Elliot Wave Overview

A quick breakdown of how Elliott waves work should help to clarify the concepts contained in this analysis. The Elliott wave principle states that, in a bull market, markets rise in a series of 5 waves up, followed by three waves down. These five waves up and three waves down combine to make up larger waves which follow the same pattern (5 up, 3 down).

Long Term Trend Analysis

With that in mind, we take up the analysis of SPY beginning with the intermediate uptrend which began in November 2011 and ended in May 2013 (starting at blue wave 2 and ending at blue wave 3). During this time period, SPY rose from below $110 to nearly $170 in a series of 5 up waves (labeled in yellow).The top of this intermediate rally reached the upper boundary the trend channel. The last time prices reached the top of the trend channel on a 5 wave count was in April 2011 (at blue wave 1). The decline that followed formed three minor down waves over the next 7 months (purple waves a, b, and c) and took prices to the bottom of the trend channel.

Current Downtrend is "Intermediate" in Significance

Because we have reached the end of the third intermediate wave of the bull market (blue wave 3), we have reason to believe the downtrend which began on May 22 will be on intemediate significance. The probable range for this decline is illustrated by the light purple triangle.

Profit Targets

Support at $153 is the first, and most conservative, downside target on the weekly chart. It intersects the lower boundary of the uptrend channel in February 2014. Below $153, a more aggressive target for support lies between $146.25 - $148.75 and intersects the uptrend line in October/November 2013.

Looking for Short Entry Points

The decline from $169.07 on May 22 to $155.73 on June 24 (purple a) appears to be the first wave of a three wave downtrend. Traders should refer to the daily chart beginning November and the hourly chart beginning May 22 in order to identify prices at which to sell short.

Summary of Overhead Resistance

I've got my eye on four resistance levels to use as potential short entry points. 

• $161.25
• From June 4 and 5 lows
• $162.25
• From 50 and 20 day moving average and May 9 low
• $163
• From the hourly chart. See below.
• $164
• From the minor downtrend drawn across the May 22 and June 18 tops.

Prices are currently testing resistance from June 4 and 5 around $161.25. 

The next resistance lies at $162.25, where the 50 and 20 day moving average overlap with the low from May 9. Given the coincidence of the 50 and 20 day moving averages with resistance at $162.25, this is the most likely reversal point.

The last resistance before I will re-evaluate my bearish bias lies at the downtrend line drawn across the May 22 and June 18 tops. SPY could rise as high as $164 over the next week without breaking the minor downtrend.

Traders are encouraged to watch price action at these price levels closely for signs of weakness, i.e., large volume reversals and false breakouts. 

The daily and hourly charts below illustrate overhead resistance.

Disclaimer: The analysis above is for educational purposes only and is not investment advice. Trading involves risk and investors should conduct a thorough analysis of their financial situation before undertaking any market operations. Stockmarketmonk.blogspot.com nor the owner can be held responsible for any losses (or gains) incurred from information provided within the website.