Falling or Stalling | Smart Chart Investor

Last weeks price action in the S&P 500 index marked 9 consecutive weeks of volatility. Big intraday and daily swings are almost expected now. I don’t know about you but I’m ready for the good old days when things just go straight up…right?

Just kidding…kind of.

SPDR’s S&P 500 Trust Series ETF (SPY) weekly

If you look at the weekly chart of SPY, the ETF proxy for the S&P 500 index, the upwards price action from the bottom in 2009 is “framed” by the upward sloping white trend lines that form a rising channel. Price action inside of the channel is “normal” as is bouncing off the channel bottom and fading back from the top. You can see that price has been trading above the channel and at a higher rate since last September.

Price got stretched too far too fast. What we are experiencing now is the “normalization” of price; reversion to the mean, equilibrium, back inside the channel where it belongs. Fair value in the current bull market is a rising value that is smack dab in the middle of the channel which is represented by the rising green line. This price zone is currently about 8% lower than Friday’s close which, by the way, is still above the higher channel bracket.

This doesn’t mean SPY will fall another 8%. Price could just stall until fair value catches up. So, somewhere between falling and stalling would be healthy. Yes, there is a price to pay for healthy.

See the daily chart for a closer look.

SPDR’s S&P 500 Trust Series ETF (SPY) daily

The lower bracket is currently about 14% below current levels. There is no telling when price might tag this rising support zone but it might prove to be a tremendous buying opportunity.

Bond prices have firmed up from mid February into previous rising support (see weekly TLT chart). The $US has bounced slightly off support (see weekly UUP chart). Financials are trying to break above all time highs from 2007 (see monthly XLF chart). Tech is trying to hold above all time highs from 2000 (see monthly XLK chart).

Price action in these important sectors is battling around critical support and resistance zones. This may take a few months to play out.