This week the S&P 500 (SPY) rallied back to the weekly 21 exponential moving average (EMA), which is a pivotal level of resistance for this bearish trend. For both the bears and the bulls, how the market behaves at this level will likely dictate the direction of the next few weeks.
Keep in mind that reversions to the weekly 21 EMA are normal throughout the course of a trend. Looking at the chart below, you can see that last year we had several pullbacks to the weekly mean, which all made for great buying opportunities.
In a bearish trend, rallies to the weekly 21 EMA make for great opportunities to get short, so long as the market continues to finish the week closing below the mean. At the moment we are patiently waiting to initiate a few shorts on the indexes here, but we’ll need volatility to spike to start triggering more downside.
While the SPY rallied to its weekly mean on Friday, the Volatility Index (VIX) faded to its own weekly 21 EMA, which could be the “low” for volatility.
Watch VIX closely next week, especially after having closed Friday trading under the bottom daily Bollinger band. In the event VIX begins to rally from here, we could see the markets begin to roll back over.
Remember there’s no need to rush trade ideas in this environment.
Focus on structure, identify your levels, and patiently let things unfold while you pick your spots wisely. If the markets finish next week with a close above the weekly mean, it signals a big shift in trend and structure and would require us to begin tweaking our game plan.
So long as we’re under the weekly 21 EMA, be prepared for the next flush once VIX begins to wake up.
Stay Focused!