SPY: Don't Fight the Rally, Downtrends Include Highs Too

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Primary Chart: Downward Trendline from All-Time High, Various Anchored VWAPs and Fibonacci Levels

Rallies in Downtrends Are Part of the Process

Don't fight the rally in , the ETF tracking the S&P 500 (). Bear rallies are part of every downtrend. Many are debating whether equity markets have put in a lasting bottom in mid-October 2022. Although this seems unlikely given the macroeconomic headwinds and interest-rate environment, no one really knows the answer to these questions.

SquishTrade favors the continuation of trends, especially at the larger-degrees of trend, rather than reversal. So at the primary degree of trend, for example, from the all-time high, it makes sense to favor the odds that such downtrend will continue despite a reversal of trends at smaller degrees of trend (such as the uptrend shown on short-term time frames such as intraday charts and perhaps even the daily chart). But favoring the continuation merely recognizes the probability that the downtrend will resume at some point—and acknowledges that no certainty exists about whether a lasting bottom / major trend reversal has occurred. In short, no one knows what comes next. So we fall back on what is more probable and what is less probable.

It's important to remember that downtrends include both highs and lows. A downtrend is defined by lower highs and lower lows, and on the daily chart and weekly chart since the all-time highs in January 2022, higher highs and higher lows appear. Sometimes, we traders sometimes wish that price would just move smoothly downward in more or less a straight line. But this does not happen. At each lower high in this current downtrend—March 2022, June 2022, and August 2022—major rallies led to actual market highs, albeit lower ones than previously.

So don't fight the highs as they are part of every downtrend process. Even if one's macro research and technical analysis continues to support a bearish case, and the bearish case may end up prevailing in the larger degree of trend, it remains prudent to avoid fighting the rallies. This is a lesson the author has learned the hard way. Bear market rallies are powerful and sharp, often defying all logic. A prime example occurred last week, when major FAANG stocks like META, GOOGL and AMZN took major hits to the downside but indices remain stable and even rallied hard at the end of the week. Irrational? Maybe. But it's what the market wanted to do, so it's best to flow with it. And the rallies are part of the downtrend process, and in fact, they can provide better shorting opportunities than shorting at the lows expecting the downtrend to move in a straight line.

Price Has Moved into a Key Price Zone from $380 to $413 SPY

For the next couple of weeks into mid-November 2022, the following technical levels and patterns remain relevant.

1. SPY appears to have moved back into a critical price zone between $380 and $413—corresponding approximately to $3800 to $4146 on SPX. Support for this range lies at $380, which can be found from both price support over the past several months as well as Fibonacci analysis:

Notice on the Primary Chart how price has now moved back above a longer-term Fibonacci retracement level at $380, the .382 Fibonacci retracement of the entire rally from Covid 2020 lows to January 2022 highs). This is now major support, having been resistance in prior weeks.
Another key Fibonacci retracement lies at $380.05, which is the .382 retracement of the recent decline from August 16 to October 13, 2022.
This $380 level is therefore an area of strong support going into next week. Within the next couple of days, the key 21-day EMA should also move right up to about $380 (though it lies at $375.13 currently).
The yellow rectangle on the Primary Chart shows how this crucial area has served as important support and resistance—as well as a consolidation zone—for many weeks within this downtrend. Price bounced hard off this zone in late February and mid-March 2022. Price chopped in this zone in May and early June 2022, with a whipsaw break below it in mid-June 2022 that ultimately ended with price working its way back into the zone in July 2022. A whipsaw breakout above this zone occurred in August 2022, and this also failed with price falling back into the zone. Finally, in September and October 2022, price broke decisively below this zone. But now it has pushed its way back into it with another sharp rally over just two weeks (about 12 trading sessions). In short, this zone remains a very important area and magnet for SPY.

2. This crucial zone from $380 to $413 is reinforced and confirmed by the key anchored VWAPs, shown more distinctly on the supplementary chart below. The dark blue VWAP at $413 is anchored to the all-time high at January 4, 2022. A bunch of key short-term and long-term VWAPs run near the lower edge of this $380-$413 zone. These include VWAPs anchored to (i) the March 2020 Covid low (pink) at $385, (ii) the mid-August 2022 high (orange) at $382, and (iii) the mid-June 2022 low (green) at $386. On Friday, October 28, 2022, price reclaimed all these VWAPs except for the dark blue VWAP from the all-time high which remains at $413, at the top of this key zone.

Supplementary Chart A: Key Anchored VWAPs

3. The upper edge of this key zone (yellow rectangle's upper boundary) shows confluence with key Fibonacci levels, trendlines and the January 2022 VWAP. The key resistance ranges from $399 to $415. The Primary Chart shows two Fibonacci levels at $399 ($400) and two more Fibonacci levels at $413. The downward trendline from the all-time high lies right in this area as well, and because it slopes downward, it covers most of the zone. The VWAP anchored to January 4, 2022, lies at $413. Note that two of the Fibonacci levels at $399 and $413 were derived by projecting the rally in March 2022 from the low in October 2022, as the rallies (so far) appear to be somewhat similar. SquishTrade is watching to determine whether the present rally off October 13 lows will be roughly symmetrical to the March 2022 rally.

4. The target range for this rally appears to range from $399 to $413. See the yellow circle on the supplementary chart below, where two arrows each point to a confluence of levels, one at $399/$400 and the other at $413-$415. As discussed, these two upside targets are defined by Fibonacci, the YTD down trendline, and a variety of relevant VWAPs discussed in paragraph 2.

Supplementary Chart B: Target Zone for the Present Rally

The Current Rally Should Be Respected until the Primary Trend Resumes Lower

As mentioned, the trend the still remains in effect at the primary degree of trend (the trend YTD over the past 10 months). So this larger-degree trend is favored and remains the higher probability price path—but until it resumes lower, the rally should be respected.

Although the author remains bearish at the primary degree of trend, he acknowledges that markets can do whatever they want, and no one really knows with certainty what happens next. Our job as traders remains to flow flexibly with what the market is doing at all levels of trend, watching how price responds to each level. And on the shorter timeframes and smaller degrees of trend, price is bullish until markets confirm that the rally is done.

Lastly, here are some key technicals to watch to determine whether the multi-week rally remains in effect:

The anchored VWAP from the October 13, 2022 low (shown in black on the Primary Chart).
The parallel channel containing price since October 13, 2022 lows. Note that a break of this channel does not mean that the downtrend has resumed immediately, but it weakens the case for the strength of the current rally and adds "probability" to the resumption of the downtrend depending on how price responds to the key resistance levels).
The 8-day and 5-day EMA's slope and price relative to those EMAs (above / below). Currently, they are sloped upward with price holding well above them. This supports the rally.
Price relative to the key $380 level, which is the lower level of the key price zone discussed above (yellow rectangle on Primary Chart). This level represents a line in the sand. Decisive breaks below it can quickly lead to lower prices.
Price relative to the upper and lower VWAPs coinciding with the key price zone of $380 to $413, as shown on Supplementary Chart A.
Price response to the down trendline from all-time highs in January 2022 and the VWAP anchored to that point.
VIX's decline from highs in late September and early October 2022.
Price response after the FOMC meeting next week, though use caution—the first move, and sometimes the first and second moves, after the FOMC presser tend to be whipsaws (false moves).

It's also important to note that price rallied hard last week. Those gains would seem likely to be consolidated soon. Price reached the 50% retracement of the August 16-October 13 decline at about $390 ($389.92), which corresponds to about $3908 on SPX. Even if price does rally further to the target zone identified, such a key resistance level as this $389-$390 level likely would repel price at the first contact.
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.

Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.

DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.

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Correction:
The following statement in this post contains an obvious error: "A downtrend is defined by lower highs and lower lows, and on the daily chart and weekly chart since the all-time highs in January 2022, higher highs and higher lows appear."

This should state as follows: "A downtrend is defined by lower highs and lower lows, and on the daily chart and weekly chart since the all-time highs in January 2022, *lower* highs and *lower* lows appear."

거래청산: 타겟 닿음

SquishTrade's October 29 analysis, above, provided a target zone of $399-$413. This zone was reached this week with SPY hitting $402.31. The upper edge of this target zone may still be reached as discussed in recent SPX or SPY posts.

SquishTrade also suggested that traders not fight the bear rally, and that statement turned out to be prudent (even though it's really just a fairly obvious truism). ("Don't fight the highs as they are part of every downtrend process." Downtrends include lower *highs* and lower lows.)

Lastly, SquishTrade correctly suggested that after the hard rally, consolidation would likely occur after price hit $389-$390. This also worked out as discussed above. (To quote the above post, ST said: "It's also important to note that price rallied hard last week. Those gains would seem likely to be consolidated soon. Price reached the 50% retracement of the August 16-October 13 decline at about $390 ($389.92), which corresponds to about $3908 on SPX . Even if price does rally further to the target zone identified, such a key resistance level as this $389-$390 level likely would repel price at the first contact.")

거래청산: 타겟 닿음

In the last update on Nov. 16, the lower edge of the target zone was reached at 402.31 SPY. After a couple weeks of choppy action, price worked its way beyond the middle of the target zone closing at 407.68 SPY, which lies just below the downward TL from the all-time highs on January 4, 2022.

거래청산: 타겟 닿음

Price reached the upper edge of the target zone this morning at 4100