markets end with a strong bounce but bearish momentum looms

$SPY continued its bounce higher for the second week in a row finishing the week with a +1.68% gain and finishing the month lower in total down about -5.0%.

With fibonacci levels overlayed on the above SPY chart we can see we are rallying into the 50% retracement at 194.32 from this most recent leg lower which started on 12/29/16. Note this level does coincide with a prior area of resistance (multi-day highs) which should make this zone even more difficult to push through heading into next week.

When we first started to reverse off the lows last week we discussed how important it would be to closely monitor how far this bounce could travel, keeping in mind the strongest trends usually only see 25% to 50% retracements before rolling back over.

Short term momentum indicators suggest we have more fuel in the tank to push higher early next week, but once that remaining energy runs it’s course we should get a good feel for how comfortable this market is trading around the mid 190s. Do we simmer down and move sideways comfortably? Or do we see sharp rejection lower, or even acceleration higher?

As we think about the bigger picture market structure we can look toward the monthly timeframe of the SPY which shows that we have clear resistance above 211 and clear support around 180.

The initial bounce off the 180 test looks promising, but notice the 8 period EMA is in motion to cross below the slightly slower 20EMA which signals downside momentum is building on this monthly chart of the SPY.

But the cross hasn’t happened yet, and of course the cross has no grand meaning, it’s simply the way we choose to measure dominant market direction. So once again, as we asked ourselves earlier when looking at the daily chart, we need to look for more clues to see if we are in store for a wider, choppier range between 180 and 210, or will we make another sharp move lower and re-test this major 180 support? Or surprise everyone and explode toward highs?

As far as our trading goes, we’ve added more short term long exposure throughout this week and continue to hold the highest levels of long exposure we’ve had all year. Stops are trailing behind those positions and we’re ready to step aside when this market suddenly decides enough is enough for this bounce.

Below are a few trade ideas to have on your watch-list going forward. These are outperforming names that are close to or currently emerging from healthy consolidation patterns.

These are the types of names and patterns we trade every day, so if you like these ideas and want to learn more about our process, or you just want trade alerts, check out our premium membership for more info and perks.

I’ll skip the commentary on these ideas, and let you look through.