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Familiar Pattern Playing Out So Far

As of 11:22 am est the S&P500 is slightly lower by 3 points to 1,552 but off of it’s low near 1,548. Last week once again saw key support at 1,538 hold. Yes, Thursday’s low was 1,536 but the index couldn’t even spend 5 minutes at that level before bouncing back above 1,538. Moreover, Thursday saw SPX close at 1,541 which to me confirms the importance of 1,538. I like to think of support as a trampoline, not a glass floor. When you jump into a trampoline your weight causes the surface to first bend lower before propelling you higher. The move to 1,536 was the market taking that proverbial jump onto the 1,538 trampoline, and it was propelled higher to 1,541.

  • 3 tests — SPX has now tested 1,538 three times
  • Familiar pattern — SPX’s last few days matches a pattern that has showed up a couple of other times this year

With the successful hold of 1,538 last week, SPX has now tested this key level 3 times: 3/19, 4/5, & 4/18. I don’t see the market being able to hold that level again a fourth time though if it should get tested. Reason being, psychology. Dip buyers will buy at a key level only because they fear they will not see that level again. With 1,538 appearing 3 times in the last month just about, I don’t anticipate traders having a similar appetite for that entry level if it shows up again too soon. What I also notice is the time between the 3 tests decreased from one to the other (11 days vs 9 days). To be safe, the bulls need to see the 1,540-1,545 range hold from here on out, otherwise my bias would be a move towards 1,500.

Last Thursday when SPX was testing 1,538 it was also doing something it hasn’t done quite often this year:

“SPY, is below its opening price and in the red for a second day in a row. If SPY closes below $155.37 it will mark the first time since 2/21 & 2/22 that it closes lower than where it opened 2 days in a row. SPY has still not experienced a stretch of 3 days in a row where it closes below its opening price so that is definitely something to watch for tomorrow (assuming today stays below $155.37). Moreover, SPY is on track to close lower for its 4th day out of 5, something it has only done one other time this year (from 3/15-3/21).”
-Market On Track To Do Something It Hasn’t Done Often 4/18/13

SPY did end up closing below its opening price and lower for a 4th day out of 5 fulfilling both the 2/21-2/22 & 3/15-3/21 and criteria I alluded to in the cited paragraph. In both of those instances SPY experienced a green day immediately afterwards and then a red day after that. Friday was the green day, and today is so far red, so the pattern is playing out once again (but still need to close red on the day in order for a 3rd instance to be confirmed).

What’s interesting is when this pattern has showed up, the red day after the green day (so today) has marked at least a one week low as seen on 2/25 & 3/25. That makes today’s low ($154.75 as of 11:53) very important because if it holds the pattern will repeat itself and we should see higher prices as the week progresses. Below today’s low anytime over the next 5 trading days though and there’s a deviation from what has been a bullish pattern which I would in turn consider bearish and expect lower prices in the immediate term.

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