July 21, 2017

April 13th Gap Closes in SPY

The month of September has certainly not lived up to its historical billing as “the most bearish month for the market”. Since the gap up on 9/1 SPY has advanced 7.52%. However, the gains have been on the backs of very low volume. Couple this with what I have been stating over the past few trading days and you can see just how the probability of a short-term decline has increased dramatically.

Seasonal weakness, extreme overbought readings and today’s close of the 5/13 gap at $114.73 had pushed the high-beta QQQQ to an RSI (2) reading to over 99.5. At the close the RSI (2) had moved to 79.6, but the RSI (3) and (5) remain in an overbought state with an 84.2 and 83.3, respectively.

The close of the 5/13 gap was almost picture perfect as the SPY faded almost immediately after the gap closed.

I now plan to use the $114.73 area as my of max pain or stop-loss. If the underlying SPY pushes through $115 with no problem given the recent short-term bearish indicators that have moved into the market then I will just have to concede to the bulls and move onto the next trade. As I always say, trading is a marathon and not a sprint.