SPY: Weekly Analysis

My thoughts on SPY for the short coming week;


Fist, Recap:
- SPY was range bound within the predicted trading range I posted for last week, being 373 - 399. It did test 372 but immediately returned back within range.
- As such, SPY mostly consolidated and did not assert overt bearishness or bullishness (as it failed to make any meaningful attempt to break out of its predicted range)
- SPY did fail its bull target that I set for it, which was a retest of the higher 390s. In fact, it was rejected off 393 and quite aggressively came back down to the 80s and 70s before getting halted at the bottom end of the range. This marks yet another bull target that SPY has failed to reach.
- We had some negative catalysts this week (GDP and Powell discussing his concerns, most notably that inflation is a growing concern) and some positive (PCE was fairly positive). Yet, the market seemed to be fairly net neutral to this news. There were some bullish days, some bearish days, but overall the week was one of consolidation.
- SPY's chart is awkward and open to interpretation. I can see multiple different patterns depending on one's perspective. Thus, there is a quite an air of ambiguity around what to expect in the technical sense, because there is no clear technical setup for any play here, IMO. But, as a quant math based trader, I always say challenge accepted in these circumstances ;).
- SPY has also been range bound in a standard deviation range of -2 to -2.5 (chart posted below).
- VIX failed to meet my target price of the 25 range, but came close hitting the 26 range on Friday (chart posted below). My target price on VIX would have roughly corresponded to a move towards the upper 390s on SPY.
- UVXY has been bouncing around in a symmetrical triangle and is working its way to the tip (chart below).

Charts:

SPY Z-Score Chart (Standard Deviation Chart):


Looking at the Standard Deviation Z-Score chart, you see that SPY found support at -2.5 SDs, a recent area of strong support and resistance, and bounced upwards towards -2 Standard Deviations. For SPY to reach -2 SDs (an area of recent resistance), would be a price of 389.

VIX Z-Score Chart (Standard Deviation Chart):



VIX found support just above 0.5 SDs at 0.7 SDs. I was anticipating it to find support around 0.5 SDs in my previous post and this is still a possibility. 0.5 SDs corresponds to a VIX price of 25.29.
Here it kind of looks like a double bottom could be forming which could lead up to a possible bearish bat pattern. But this, of course, is highly speculative.

UVXY Chart:



UVXY entered my demand zone on Friday and is now making its way to the bottom of this triangle, which has a price in the $13 range.

Trading Range:

The trading range predicted for this upcoming week is 365 - 388. This trading range has seen a bearish divergence from last weeks of 373 - 399.
Remember, the assumption that I make when modelling anticipated trading ranges is that SPY wishes to make measured, consolidation type moves. That way, if there is a break of the trading range in either direction, we know what the overwhelming sentiment is. So in this case, if it breaks below 365, we know that the overwhelming sentiment is bearish. If it breaks 388, we know the overwhelming sentiment is bullish.


Catalysts:
We have another FOMC minutes being released on the 6th at 2 PM EST.
The previous FOMC fiasco was June 15 and it resulted in a really lame rally, that did not quite live up to expectations and was followed by immediate rejection and resulted in a major gap down the next day.
So lets see how this one plays out.

Interpretation:

My interpretation of the data and rationale will follow:

1. SPY remains bearish. Shocker right? Lol
Reason: SPY has consistently failed to meet bullish targets. The first failed bullish target was 420. Then, was high 390s. It has consistently been unable to find the strength to really surpass or even simply meet expectations of bullish targets.

2. SPY has limited upside room.
Reason: VIX is kind of in an awkward place on the Z-Score chart to make a dramatic sell off. I agree some pull back is possible to bring VIX to that 0.5 SD range, but I can't really see it wanting to drop dramatically from 05. It is possible, just pretty unlikely. The fact that we are also seeing quite the bearish divergence in the predicted trading range also makes me think that SPY is not strong. The bull run it did on Friday was cute, but failed to really do anything to SPY's technical in terms of shifting it to a more bullish outlook. All it succeeded in doing was getting longs hot, bothered and hyped and giving shorts a better entry point.

3. SPY has chilled out a bit.
Reason: The fact that SPY has rested in this -2 to -2.5 SD range and not made dramatic movements in either direction tells me that my thesis on SPY doing something similar to 2018 was kind of true. SPY has elected to chill and remain range bound as opposed to bouncing dramatically in order to stabilize its oversoldness. This may not be by choice and more by necessity. SPY is clearly not attracting the type of institutional buying that it requires in order to give it a meaningful bounce. I saw a ton of this buying last Thursday and have not seen it repeat since. In fact, I have seen a pick up in heavy shorting when looking at put to call ratios that has picked up a little bit more than previously.

4. Upside is likely capped.
Reason: Well, the chart alone, both the actual candlestick chart and the Z-Score chart for SPY and VIX really make me believe that it would be incredibly difficult for SPY to really gain the traction and momentum it needs to really rally into some impressive numbers. Its not impossible and it could very well happen, but the reality is, like I said before, SPY is really not attracting those institutional buyers it needs.


Verdict:

SPY is most likely a short here.
The reality is, the safest position is short. SPY has sold off aggressively and unexpectedly without warning while everyone was gearing up for bullishness. It has taken most people by surprise on how aggressive the selling has come and SPY has tumbled. Its been absolutely impossible to time SPY's tumbles and really, the reality is, you just need to look at the bigger picture.
IF you are swing trading and trying to catch every move (up and down), you will more than likely get caught in this dramatic act. Its best to go with the trend and be safe. I am not much of a swing trader and I try to avoid it greatly, but I was reviewing my log (provided by my broker because lord knows I don't keep track of this nonsense, I probably should though haha) and in this past year, I have done 48 swings (not a lot I know, but I really really am a true blue day trader) and have had 3 losses. All of them were long. So my personal choice is to just stay away from long and stick with the trend. But you must do your own analysis and stay vigilant. If you want to swing this long be careful.

What to Expect Tuesday:

Tuesday I am looking for a chop day going into the minutes release on Wednesday.
We can expect to see lows at or below 377 and highs at or above 383.95. I am not really expecting SPY to go full fledge bearish on Tuesday, I think, looking at the chart, we could see some chop and stability, but any drop below 377 would be a concern that SPY is taking a turn in the bearish direction.
I do think we can see some more upside here, but I just think its limited to the higher 380s. Potentially 390s, but you know what the means right? Just another target for SPY to fail at.

My positions:
I scaled in short , starter size, on SPXS at close on Friday. I got filled below ask so that was great!
I will likely add to my short position with TSX:HSD on Monday if futures maintains a bullish sentiment.
On Wednesday I plan to scale in a bit heavier short on SPY and also I plan on shorting the TSX as well (TSX:HED) in anticipation of the FOMC minutes release.

These are my current and upcoming swing positions.

Thanks for reading.


Leave your comments, questions and critiques below!

Take care,
Happy Independence Day to my American Friends and Happy Canada Day to my Canadians!