SPY Stool Tips Over Targeting The Bottom (NYSEARCA:SPY)

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Our daily SPY report (NYSEARCA: SPY) included our sell alert that we sent to subscribers on Wednesday which was triggered late Thursday as the SPY crashed to $404 before the close. Even if we had set up this alert, we were surprised when it triggered on Thursday, ahead of the actual CPI announcement on Friday. It was evident on Thursday afternoon that the SPY was anticipating bad news, from the CPI report, that would drag the market down. This is exactly what happened on Friday. Thursday afternoon’s selloff was dramatic, culminating in the break below the $404 level. This triggered our automatic sell signal alert. The CPI crash actually happened on Thursday and continued on Friday. And now?

The bear market continues

Clearly, the bear market continues and we await a retest of recent lows. Hopes that this was the bottom of the bear market have now evaporated. The base scenario of $390, which some have, is now a thing of the past and the bear is looking for a new low. As we published in our previous article, our best case scenario for the SPY was around $385 and our worst case was around $331. We pegged the probable case at ~$369. This is our next short term target for a technical rebound.

Technical bounces during bear markets can be quite strong and we were looking for such a bounce. We haven’t had it and it’s bearish. Bottom fishers are not buying this market yet. Consider that they are always too early in their purchases. They create the bottom by buying early and stopping the further decline of the market. Even after you start buying, there is a long bottoming process often described as a saucer or “W” shaped bottom. This bear market has not even started the bottoming process yet. The failure of this technical rebound, and its short lifespan, tell us.

Future market bottom

Another indicator that the market has bottomed out is a huge sell-off in volume that eventually wears down all the sellers, who are slow to throw in the towel on this bear market. Usually inexperienced investors wait for the bottom to sell their holdings in the index and bottom fishers wait to buy. All of this is still ahead of us.

Consumers will start to feel the pressures of this SPY stool rocking here. The SPY is a leading indicator of what to expect for consumers. They are starting to feel the pinch of high prices and higher interest rates. As this torture escalates and people feel less wealthy, due to their 401k losses, you will see consumers cut spending and reduce demand. This leads to a recession. That’s what this leading indicator, the SPY bear market, is telling us, but it’s only just beginning to show for the consumer. I doubt many consumers are cutting back on their summer vacation plans. They will pay high gasoline prices this year. The spending cut happens next year after the market bottom is in place. I guess the bull will reappear before the next presidential election.

Look at the tip of the stool

Our daily SPY report watched the SPY trapped in the $408-$417 trading range. Trading this range was easy money, but it was also a downside trap, as the technical bounce was struggling to come up. We now know that the fear of the IPC was probably creeping into the SPY. It peaked on Thursday afternoon when it crashed below $404, our predefined sell signal. The technical rebound was aborted and hopes for a more robust technical rebound were dashed.

Bad news has hit the energy sector on fire. It was extremely overbought and was looking for an excuse to pull back and test the uptrend support. No surprise here when it happened. It couldn’t have come at a worse time, as the technical rebound was already in trouble. Now the market leader has been hit.

At this point, it wouldn’t have taken much more pressure to tip the stool. Instead of a slight push, the CPI crushed it, starting early Thursday and watching it dip Friday. It wasn’t pretty. It was not unexpected. The market has been worried all week about the CPI announcement on Friday, but somehow the SPY found out Thursday afternoon.

Here are the daily charts that we watched and wrote every day for our followers. We had not predicted the fall. We are not in the business of prediction. Signals tell us what is happening. Our sell signal alert at $404 on Thursday afternoon told us what would happen on Friday. The SPY told us. The Thursday afternoon big sellers told us.

Monday start

The week has started well and here is the graph and our comments from Monday:

Before the CPI crash

Monday, June 6 SPY (StockCharts.com)

You can see that all signals show demand and the lower signal, Full Stochastic, shows overbought demand. The price is trying to reach the downtrend of the 50-day bear market at $423 but is struggling. Here’s what I wrote to subscribers when I sent them this board on Monday:

If this technical bounce continues for at least a few more weeks as I expect price will continue to test 416 to 420. Either the buyers are exhausting the sellers at these levels and we are moving to 428 OR the buyers are exhausted , the technical bounce ends and the SPY goes down to retest the bottom at 385. I don’t expect this bottom to hold and I expect the SPY to continue lower looking for a bottom.

So you can see I was surprised when the SPY stool fell on Thursday.

Wednesday sell alert, chart and commentary

Here’s a copy of the sell alert we sent via Seeking Alpha on Wednesday:

SPY triggered Thursday 3:30 p.m.

Wednesday $404 sale alert sent to subscribers (SearchAlpha)

We were surprised when this sell alert was triggered on Thursday before the close.

Here is Wednesday’s 5 minute chart and you can see that the SPY is going through a tough time with resistance at $415-$416.

SPY withdraws to test support

Wednesday’s SPY Arrested by the Resistance (StockCharts.com)

We have written the following to accompany this chart and the sell alert:

Naturally, an unpleasant surprise can occur at any time. So I have set up a sell alert if the price falls below 404. If that happens my target is a retest of 385. I expect that to happen when this buying cycle is over .

You can see that this sell signal alert turned out to be very timely, although I couldn’t predict when it would be triggered.

Disaster Thursday

Here is the 5 minute chart from Friday morning and you can see the big sell off that starts Thursday afternoon and triggers our SPY sell signal at $404 before the close. You may also see Friday’s opening gap lower due to bad CPI news on Friday.

SPY before and after CPI news.

SPY Selloff Thursday and Friday (StockCharts.com)

Here’s some of what we wrote to our followers on Thursday night:

Traders like to be flat for the weekend. Looks like they started early and want to be flat going into the CPI number tomorrow, or want to go short. We had our sell signal alert set to 404 and this alert was triggered this afternoon as the SPY crashed below before entering the fence.

Conclusion

The big technical rebound never got past first base. The bad news of the week blocked him. Fear of the CPI figure on Friday kept the SPY in check. Then on Thursday, the SPY realized that the CPI was going to be bad news. Selling started in the afternoon, triggering our predefined sell signal at $404 around 3:30 p.m. The CPI crash continued on Friday, leaving us with a bear market that continues to fall, looking for a bottom. We are leaning toward our worst-case scenario of a bear market bottom around $331. The market is down and looking for support for the next technical bounce. We think it’s less than $385. We report on SPY daily after the close. Stay tuned!


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