SPY Bearish Engulfing Candle
Last week gave the first real signal for the pullback everyone is waiting for.
There were still far too many bears getting excited last week after a huge red candle on Thursday denied an attempt for yet another new high mark for SPY.
I understand the excitement, but it was still a little premature.
That said, the red candle that got everyone stirred up was technically a bearish engulfing candle which can signal additional selling in the near term.
A bearish engulfing candle forms when the price opens higher than the previous day’s highest price (a gap up to open the day) only to then sell off and close lower than the prior day’s low.
Here is a close up look at Thursday’s bearish engulfing candle for SPY.
This pattern alone is not enough to change my sentiment but it is notable that it showed up right at the recent high, which is technically a resistance point.
A bearish engulfing candle in the middle of a big push higher is not a great indicator but when they show up at points of resistance, it gets my attention.
I will also add that SPY’s relative strength index (RSI) has dropped lower than we have seen it since the rally began at the end of last October.
RSI is still fairly strong, holding above 50, but the trend is lower and has been for the past two months.
Zooming out a bit, you can see the consolidation that is now taking shape for SPY. Not a sign that we are rolling over just yet, but again, worth watching a little more closely.
The focus now is on continuing the trend of higher highs and higher lows. I would not be surprised to see a retest near or even slightly below 500.
If we got that pullback, it would fill the gap from February and will have pushed below the 50-day simple moving average (SMA).
This would be a nice set up for a snap back and a buy the dip opportunity. If we get it, I plan to take advantage and will then be looking for the uptrend to continue.
That is when the real information will present itself. If we get a pull back, will markets be able to power to new highs or will they roll over at a lower level.
If SPY is unable to get above 524.61, fear could start to creep in and selling might accelerate.
Effectively, we want to keep the pattern of higher highs and higher lows. That is all that really matters.
I do not think the next few months will be as clean as the past few. I expect increased volatility which will both create a lot of opportunities but will also present some challenges.
And taking a quick look at QQQ, the 4-hour candles show that consolidation continued last week with the top of the range holding at 446.58 and support below at 434.75.
These are key levels, a break above the top of the range would likely start another rally. A break below the bottom of the range could quickly see another 20-30 point drop follow.
We get new CPI and PPI numbers this week and another round of earnings is starting up with a few big banks reporting Friday.
If you have upgraded to the paid subscription of A Trader’s Education, I owe you multiple trades this week and that is exactly what you’re getting.
Thank you for your patience over the past couple of weeks. I am feeling 100% again and am ready to kick it back into high gear.
I have plans for MSOS and AAL and am working through my entire watchlist for the best set ups heading into the second week of April.
All of those trades will post tomorrow morning, followed by the weekly trading prep with my friends at The Trading Triangle.
It has been a great start to the year. Let’s keep things rolling!
-Nate
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Glad you’re feeling better 🤘🤘
That candle certainly caught my attention too