String of Indecisive Dojis Foreshadows Trouble for SPDR S&P 500 ETF

Increasing demand following a lasting bottom generally leads to higher prices. The SPDR S&P 500 ETF has seen higher prices (since the June 24 low), but the candle formation since then reflect uncertainty, not increasing demand.

The SPDR S&P 500 ETF (SPY) has rallied as much as 4.3% from last week’s low and some analysts feel that the market has been cleared for takeoff again.

That may be the case, but the string of dojis of the recent low doesn’t inspire confidence in the longevity of this bounce.

A doji candlestick is formed when the open and close are the same or very close to equal, despite a wide trading range. They are generally an indication of equality between buyers and sellers.

The SPY chart below highlights the seven consecutive dojis since the June 24 low. The doji’s suggest that this rally is lacking the kind of buying pressure associated with lasting lows.

In fact, a closer look at the hourly chart (see gray chart insert) shows that SPY gapped higher in the first hour of trading five of the last six trading days. In other words, most of the gains occurred in the overnight futures session.

The big players may be running up the futures at night to sell their long position during the day.

While the string of dojis looks bearish for stocks, technicals are currently neutral.

I believe the overall odds favor lower prices. A well-defined resistance level for SPY, the S&P 500 and Nasdaq-100 provides a promising low-risk opportunity to go short. A break below support (also less preferred) would open a similar opportunity.

It will take sustained trade above resistance to unlock higher price targets.

The Profit Radar Report highlights the resistance level that serves as a low-risk entry for short sellers.

Weekly ETF SPY: SPY ETF vs S&P 500 – Technical Analysis Variations

The S&P 500 Index triggered a beautiful ‘kiss good bye’ signal on Tuesday, before Bernanke spoke and sunk stocks. Interestingly, the sell signal for the S&P 500 could not be seen in the chart of the SPDR S&P 500 ETF (SPY).

SPY S&P 500 ETF or S&P 500 Index. What’s the difference? It’s like tomato or tomato (imagine the second ‘tomato’ spoken with a British accent).

I always try to base my analysis on the purest representation of any given index or asset class. When it comes to the S&P 500, the purest representation is the actual S&P 500 Index you always see quoted.

The SPDR S&P 500 ETF (SPY) tracks the S&P 500 very closely, but even minor variations can make a major difference.

For example: The June 18 Profit Radar Report (released the night before Bernanke opened his mouth and buried the market) noted that the S&P 500 is at an important inflection point and warned:

There is a parallel channel going back to the October 2011 low. Indexes often touch a previously broken support (in this case the black October 2011 parallel channel at 1,655) before dropping to a new low. The S&P touched this channel today and failure to move above could spell trouble.

The first chart below shows the S&P 500 parallel channel referred to in the Profit Radar Report (if you aren’t a subscriber, I tweeted a close up picture of this channel on Tuesday).

I have often observed the S&P 500 (and other indexes) double back a broken support before letting go and peeling away for good. This upper line of the parallel channel was a key ingredient to the bearish forecast (the recommendation of the Profit Radar Report was to go short at S&P 1,635 and Nasdaq-100 2,970). I call it the ‘kiss good bye.’

Drawn in the second chart is the exact same parallel channel for the SPDR S&P 500 ETF (SPY). However, unlike the S&P 500 Index, SPY’s channel is placed differently. There was no kiss good bye for the SPY ETF.

Key support (red line) was broken for both, when prices dropped below the June 6 low (160.25 for SPY and 1,598.23 for the S&P 500).

The SPY chart allows us to draw a support trend line (green line) that’s unique to SPY. I wouldn’t say there is a clear winner in the SPY vs S&P 500 debate, but I prefer to base my S&P 500 technical analysis on the S&P 500 chart. It’s as pure as it gets.

Why further down side is still ahead, what the down side is, and why stocks will rally again when this is all over is discussed in Thursday’s special Profit Radar Report.