SPY Set to Retrace 50% of Recent Correction
With the indices retracing nearly 50% of the recent two-week correction, SPY is on track to create a “V-Shape” recovery. Most of the SPDR sectors are at the extreme end of their down cycle, leading to a new up-cycle. As an example, the financial sector has seen buying activity over the past few days, in block size trades, that suggests institutions are buying at the lows. If this continues, XLF will begin a new up cycle. Since this sector makes up more than 16% of the S&P500, SPY will also benefit from financial stocks optimism.
We like WFC, C, BAC, JPM, and KRE for followthrough today. If you are already in one of these positions, continue moving stops higher, so that gains can be allowed to run. This pullback was an awesome opportunity, so taking profits too soon becomes an issue. Be patient.
SPY – Is the Correction Over?
The SPY chart below delineates our thoughts. the shaded area represents current targets, minimum and maximum 50% and 61.8% Fibonacci respectively, with the 50ma just shy of dead center. Pre-market price action places 267.00 or greater just above a major VBP resistance zone, illustrated with a dashed horizontal aligned with the top of the histogram max on the left side of the chart. That will become immediate support if SPY manages to stay above it after the Opening Bell rings this morning. RSI has room to run to the upside, with Stochastic and MACD already signaling agreement in the change of trend that started last Friday.
SPY After Hours Block Trades
Institutions were active at the 266.00 level after the regular session closed. There is the possibility of a fade down to this level during the morning session, so watch VIX for clues.
Currently, VIX is down nearly 8% and only beginning what we believe will be a fade back to mean. The 50ma is our target for VIX (13.53).
Volatility has peaked. Time for a correction in VIX.
SPY and NYSE
Now that we covered SPY, SPDR sectors and VIX, we need to look at the broader market.
The NYSE Composite represents 2000 stocks, which sets a benchmark. This broad swath of market participation can point to further upside, as a 50% retracement would require stocks to continue along their current path for a while longer before reaching overbought territory.
CPI was just released. 0.50 vs 0.30 estimate. If the markets don’t retrace pre-market losses we’ll be in for a bumpy ride. “Algos” are going wild at the moment, with SPY dropping from 267.00 to 263.50 in the blink of an eye. That said, the above comments are still valid. Sales and earnings are good. Fundamentals are sound. CPI will likely be noise.
See you at 9:20 AM LIVE.
Happy Trading,
Vinny
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