SPY Monthly Candles Look Bullish - S&P 500 Technical Analysis

SPY Monthly Candles Look Bullish – S&P 500 Technical Analysis


Lately, all eyes have been on the recent short-term downtrend in the SPY. Starting on August 8th, I pointed out the short-term bearish patterns that were beginning to form in the major indices. Then, on August 28th, I pointed out a massive bearish head and shoulders that was nearly formed. However, when everyone starts to get scared out, it’s often a great time to look for longer-term entries — and I think now is one of those opportunities. Below, we’ll look at where we came from, and why it’s not as bad as it seems for the SPY. First, the SPY head and shoulders pattern is now completed.

The SPY Head and Shoulders Pattern Has Completed

Two screenshots from an article posted on August 28th predicting that the SPY would ultimately fall more than 4.5% to $420, with much of the move taking place in September. 

That was the head and shoulders then. Here it is now:

The chaos that ensued from the height of the bearish head and shoulders to the low of October led to a full-on correction in the S&P 500, with a drawdown of -10.93%, and a long 14-week downtrend.

Now, the SPY is nearing a breakout of that weekly downtrend. Personally, I think after the four strong up-days this week, we likely see some profit taking over the next two or three trading days, but within the next few weeks I believe we’ll be firmly out of the downtrend, and that the brunt of the bearish head and shoulders is complete. 

That doesn’t mean I think anyone should dive into short-term bullish bets here — but from a mid-to-long term perspective, I think this looks like a great buying opportunity for bulls. Here’s another chart that helps me confirm my bias:

SPY Monthly Candles Test Support

Measuring from the body of our Covid-19 low in April, we’ve firmly remained above the uptrend – never closing below it, and even successfully retesting it in September and October of last year with clean closes on the line that led to bounces. Additionally, this line has confluence with the recent breakout catalyzed by the hype behind “AI mania,” which led major S&P 500 components like Nvidia to new highs. We retested that breakout line in October, and so far, it looks like we’re in the midst of a bounce from that level. This is further assisted by the likelihood of an end to the year-and-a-half-long rate hiking cycle that has driven fear into the market since March 16th of 2022.

One final thing that helps fuel a rally is the presence of fear — and believe me, there is plenty of that to go around right now. Here’s a look at the CNN Market Fear & Greed Index:

This index measures seven different factors to put an integer value on the sentiment of the market, where the lower the number, the more fearful investors are. Those factors are:

  • Market Breadth (McClellan Volume Summation Index)
  • Market Momentum (S&P 500 vs 125 day moving average)
  • Stock Price Strength (52 week highs vs 52 week lows)
  • Options Order Flow (Put/Call ratio)
  • Market Volatility (The VIX vs it’s 50 day moving average)
  • Safe Haven Demand (Difference in 20 day stock and bond returns)
  • Junk Bond Demand (Yield spread between junk bonds and investment grade)

Fear fuels rallies because of the presence of “sidelined money.” Simply put, when investors fearfully sell their positions, they’re now left with cash. For institutions (which make up a large portion of that selling), they still need to beat the S&P 500 benchmark. So when stocks start to rise again, the large sums of cash they deploy can help drive momentum higher, adding fuel in the tank to stock market gains.

If you need to see the personification of market fear, look no further than Morgan Stanley’s Mike Wilson, who has a say over the deployment of a massive portion of sidelined cash. He’s still sitting on the sidelines of this rally, and he doesn’t think we will rally from here. In fact, he predicts the S&P 500 is going to fall more than 9% from here.

Counterpoint: This Notable Bear Doesn’t Believe in an EOY Rally

Having a bullish end-of-year view isn’t as “consensus” as some would have you believe. For instance, if you think the market is going to rally into the end of the year, that means you disagree with notable bear, Morgan Stanley’s Mike Wilson, who sees an end of the year rally as unlikely, and predicts the S&P 500 will end the year at 3,900. That said, in December of last year, Wilson predicted the S&P 500 would fall as low as 3,000 – which it didn’t. In January of 2023, Mike Wilson said investors who were buying into the rally were being “fooled.” In May of 2023, he said traders were “duped” into buying the rally. And then, on the week of the market top at the end of July, Wilson admitted, “we were wrong to be bearish.” This isn’t an effort to criticize Wilson or anyone else who has been wrong for a sustained period of time — it’s a simple fact check to help traders parse through the cornucopia of information they receive from finance-media’s chorus of talking heads. In other words — before you blindly take the advice of someone because they work for a big company, do your research first. 

That includes listening to anything I say. Personally, I will be buying up all the dips I can from here with bullish positions expiring between January and March in the SPY. However, I would never encourage you to blindly follow anything I say — always do your research, analyze the data, and draw your own conclusions. After all, in trading, everyone is wrong sometimes — and that definitely includes me. 

That said, when in doubt, I look to the charts. And right now, the charts have me feeling pretty good about entering bullish medium-term positions. 

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