What's Next for SPY? Using SMAs to Get Back in the Bull Trade
Breaking down the charts for SPY, QQQ, and DIA.
Markets are making lower highs and lower lows, not a great combination.
If you were hoping to get into the NVDA or AVGO bullish trades posted last week, neither signaled for an entry. There is a reason I always outline exactly what is needed to take a trade.
The work ahead of time is done to make the trading in real time as simple as possible. The decisions become almost binary.
If the candles bounce/break at ‘x’ price level, and that action is followed by this type of action - take the trade. If the candles don’t do these things, don’t take the trade.
Simply put, the candles for NVDA and AVGO didn’t do the things we needed them to do so no trade should have been taken.
Getting back to why the prep work is so important. The less I have to think while trading, the better. The goal is to be robotic.
The artform, the part that is the most fun, is reading the charts and mapping out trades ahead of time.
It is not the hardest part. The actual trading and maintaining discipline is no doubt the hardest part. So I try to keep that simple.
Part of the process is understanding the bigger picture. What is the current trend? Where is support showing up? Are buyers stepping in? Are sellers taking over?
Look no further than the charts for SPY, QQQ, and DIA for your answers!
SPY
The candles for SPY are rolling over and for the first time in a long time, making new lows. This looks likely to continue if we don’t see a reversal fairly quickly.
It looks like likely that the trendline that has been in place since November 2023 will be tested.
RSI is making lower highs below the midpoint while the candles drift lower, nearly filling the gap from just a couple of months ago.
The question becomes, when is it a good time to take the upside trade?
While that always depends on your risk tolerance, there are a few key indicators that I am paying attention to.
I mentioned the gap. When it fills the candles could sharply reverse, which is a trade I do like to take. But not here.
The candles are more likely to continue lower to test the trendline before bouncing.
The support level below that I am watching closely is 568.52. We want to see a bounce here!
If next week starts off making moves higher, we could see 580.09 hold up and that would become the level I watch for continued support.
Also, keep a close eye on both the 5-day simple moving average (SMA) and the 50-day SMA. I’ll explain.
First, I like to trade for upside in the very near term when the candles are above the 5-day SMA. When the candles cross from below to above, I look for a second candle opening and closing above the SMA as a signal to get bullish.
The same can be said for downside trading, just in reverse. If the candles remain below, the trade is bearish. Don’t fight it!
We just had a crossover and if you took a short trade Friday you could be set up nicely to make money. All of the signs are there for a little more downside.
I’ll explain how I use the 50-day SMA with the Qs.
QQQ
The candles for QQQ took an accelerated trajectory last July but just broke this trendline and could be headed lower.
The longer term trendline could be the target, with a volume shelf near 475 that looks to be at just about the right spot for support.
That is a long way down but not too crazy. Just about a 6.5% drop from here.
Notice the 50-day SMA was broken through last week for the first time in a while.
Prior breaks were short lived with buyers stepping in and powering QQQ higher. I think it is likely we see that again, but maybe we see a little more downside first.
Honestly, 6.5% lower would be a great opportunity to add for the long term portfolios. I think it should be looked at as a healthy pull back if it happens.
Getting back to the 50-day SMA, if the candles do not recover quickly (within a week), I would expect continued pain.
Generally speaking, when the candles break through the 50-day SMA with conviction (strong volume, follow through) I will go with the trend and I will do so with larger sizing.
BEWARE! I only size up for very short periods. The tendency is for shares to return to the 50-day SMA and not get too far removed from it in either direction.
DIA
Last up, the candles for DIA. Testing the long term trendline to close out last week and ready to give us a signal for the weeks ahead.
The gap has been filled, the volume shelf near 420 is being respected, and now the trendline is coming into the picture.
If selling continues next week we will see a break of all three pieces of support and the bears will apply the pressure.
Bulls are looking to return to the 50-day SMA near 435 but need to step in with heavy buying to hold the current level.
It is already getting interesting in 2025 and we have earnings season directly in front of us with the banks leading off.
More trade ideas are on the way. Have a great Sunday!
-Nate
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Great review Nate