Yesterday, SPY gapped up and made a doji to close out the day. Today, that doji was followed by a bearish engulfing candle. By itself, a doji usually means reversal. The bearish engulfing candlestick that followed the doji, in my mind, is confirmation of a reversal.
I am bullish the US markets. But I think they are in for a pull back … more so, a profit taking round.
After breaking through the consolidation that lasted about a month (the green dashed line), SPY has been on a rip. This week it made new highs, but failed to close above the all-time high set in July of 302.23. I think this is a point where investors may want to take some profits.
See the long up-trend line I drew? That started from the low of last year on 12/26/2018. Up until July 26 that line held very well … then all hell broke loose, and SPY plummeted to 281.72. It then entered a period of consolidation that lasted until September 5, when SPY finally broke out of it with a pin bar gap. Fast forward a little more than a week, and here we sit at the all-time highs again.
But, notice how after we bounced off 281.72 it tried to get back above that long-term trend line and just couldn’t do it? And then tried a couple more times but failed … Then finally on the 5th of this month it busted through with conviction. That’s why I’m bullish overall from a technical standpoint.
However, I believe we are going to see some profit taking before the Fed speaks next Wednesday 9/18/2019. I think the doji yesterday, and the bearish engulfing today, shows that we are going to pull back from this level. Not too mention, profit taking is not uncommon at all-time highs. I think the pullback takes us to around 295 area (green dashed line). From there, fundamentals will determine if we bounce off and retest the all-time highs … or more ominous … continue down through the green line and confirm a double top pattern.
TRADE WAR!!! Need I say more? It’s all about the US/China trade war. Jerome Powell and the Fed have nothing on the trade war. The market wants an end to it, and they want it now. Unfortunately for us (the market), it’s not going to happen now … well, I don’t think so anyways.
The reason SPY broke through the consolidation was because the US and China agreed to continue talks in October – the markets went berserk on the good news! But I remained skeptical; do you know why? Because when did the US/China talks ever stop? They’ve been going on for a year and a half. You gotta use logic here, but the markets don’t like logic. They like the news.
Logic tells me that nothing has changed on the trade war front. The talks have never truly “stopped” and this is nothing more than another round of them. October will go one of two ways: 1) A deal is made or 2) A deal is not made. That’s it! Don’t expect anything else. Well, the many other rounds of talks had the same two options.
When there’s talk of negations, the markets move up. When the talk turns to negative (i.e. nothing happened in the talks), the markets move down. That’s the pattern we are in, and that’s the pattern I believe we will stay in until a trade deal is made.
Donald Trump wants to get re-elected, so I think a trade deal will be made before then. But the elections are more than a year away; that’s a long time for this thing to be drawn out.
Bringing it all together
I think technically SPY is very bullish. I think fundamentally SPY is at the mercy of the trade war. Bringing those two together, I am basically trading on the news rallies or declines.
ALWAYS DO YOUR OWN RESEARCH BEFORE MAKING ANY INVESTMENT DECISION. SEEK PROFESSIONAL GUIDANCE IF YOU ARE UNSURE.