SPY: Overbought Demand Testing Resistance (Technical Analysis)

As you can see on the daily chart below, demand is driving the market (NYSEARCA:SPY) higher, testing resistance levels. Demand has reached overbought levels, but it can stay overbought for some time. However, in a bear market this becomes the first yellow flag waving at the top of the move up.

On the daily chart, you can see we have drawn a red price resistance line around $407. We have also preset a sell alert that Seeking Alpha will send out automatically when price triggers at that resistance level. Do we know if that is where the sell signals will appear on our chart? No. As always, we wait for the signals on the charts before we act. In our daily report to subscribers, we will identify these signals when they appear and here on our weekly update. However, we think the resistance at $407 is strong enough to stop this move up.

Not only is demand showing up as overbought on the signal at the bottom of the chart, but also you can see price going into the pink cloud of overhead resistance. The downward trend of this bearish pink cloud is, of course, created by this bear market move down in price. Can price break above the pink cloud? Of course, if it had some good news like the end of the war. As it is, the SPY is in a bear market downtrend, and no really good news in sight. We don’t expect price to break above the pink cloud. We expect this move up to be stopped by resistance and head back down to retest $364. When? When our signals turn down on these charts.

The positive Fed narrative right now that is driving price higher goes like this: “The economy is already in recession. After a 75 basis point hike in July, the Fed will ease back to a 50 basis point hike in September.” We don’t buy that narrative. We think that only a drop in inflation will move the Fed off a September 75 basis point hike. We don’t see inflation coming down that quickly. Therefore, longer term, we are still bearish and expect a retest of $364 support, when we get the sell signals on the charts below. Regardless of our expectations, we act based on signals appearing on the charts. There are no sell signals yet. Our daily update of the SPY to subscribers will catch the first sell signals.

Here is the daily chart showing demand taking price higher. It also shows pink cloud resistance knocking price down after reaching $400 on Friday morning.

NOTE: All the signals on the above chart are short term bullish except the pink cloud of resistance and the red arrow, long term downtrend, are bearish. Also bearish is our proprietary signal shown at the top of the chart. It is slowly moving lower, showing that the percentage of stocks in the Index that have our most important SID Buy Signal has dropped to 5.8%. Portfolio managers are having a tough time finding winners in the Index. They are selling their losers during this market bounce. How do I know? I spent my career on Wall St. working for these portfolio managers and showing them where the market was going.

Another chart we like to show is the Point & Figure chart below. It is very easy to see the support at $364 and the resistance at $404 and $412. This chart is noted for being accurate in identifying these levels.

Conclusion

As you can see on the charts, the demand signals are all positive and taking price higher to test resistance levels. As soon as price hits resistance, it gets slapped down, especially in a bear market. You could see this happen on Friday, as soon as price hit $400, it was beaten down to retest support. This pattern will continue until the demand is exhausted and the signals on the above charts turn down. That is when this bounce is over and we go short. Don’t forget that the portfolio managers are selling into strength, especially during a bear market. The traders are buying the move higher as long as the signals are positive. Meanwhile, let’s enjoy the short term buy signals and this move up to test $404 or possibly $412.