Risk is to the Downside
Market behavior yesterday was weak. The day started with market going higher and then there was a steady decline with markets closing at near their lows. I do not like this market. It is not trending and that poses problems for me.
I do think the risk is to the downside for several reasons. One is the price action above. The other is that the S&P 500 reached a high for the year in July and could not get over that level. Yet another is that the VIX is at its lows.
The above is a 1-year daily chart of the SPY representing the S&P 500. The horizontal green line is the upper level of this week’s expected move, and the red horizontal line is the lower level. I have the 10-day (green), 20-day (red), 50-day (pink) and 200-day (yellow) simple moving averages (SMAs) plotted as automated indicators.
The yellow alerts in the charts are all the price gaps that are below the current price. These eventually need to be filled. Note there are no gaps above current price. There was one gap above from July which got filled recently.
Note how the price went all the way (very quickly I may add) up to the July levels and then stalled. This was a +10% move within a month. Now the price is curling over and so are the short-term SMAs.
At the bottom I have the MACD and RSI plotted. We can see that the MACD has crossed over as of yesterday. The RSI is also indicating overbought levels. Note that I do not give a lot of direct importance to the RSI but use it as a secondary indicator.
So, the risk is to the downside. How far down can price go? I cannot predict. But 4 of the 8 price gaps were created in the current run up over the last 6 weeks.
First gap close at -3.99%
Second gap close at -6.25%
Third gap close at -7.86%
Fourth gap close at -8.95%
Those are the targets. But of course, we cannot be sure that price will hit all those levels. Price may not even hit any of them. I am just outlining the risk.
Strategy
I went “small short” yesterday afternoon when I saw the price action was weak. This is a 25% position as of now and I will increase this if market continues to go down.