Fedral Reserve Chairman Ben BernankeDon’t fight the Fed!I was watching last week’s action in the SPDR S&P 500 ETF (SPY) very closely as we had reached a critical resistance level. There were a number of technical indicators that were showing weakness and the idea of shorting the market was looking like the best bet out there.
Last week was a prime example of how fundamentals can override technicals. The momentum was looking negative for stocks going into the week started on the 19th of September and the short mindset was gaining conviction.
I jokingly mentioned that the markets would tank unless some sort of massive fundamental event occurred which would miraculously send stocks soaring out of their recent range. For the markets, the Federal Reserve’s announcement to pump more money into the system seems to have done the trick.
Now, this is not an overnight recovery announcement, but the Fed is certainly one of the most powerful forces driving world markets. One of the most valuable lessons any investor can learn is to NEVER fight the Fed.
Last Monday’s big move was a buy signal for the bulls and the shorts got squeezed out. The $113.30 level in the SPY was the key to the upside and it was breached swiftly following the Fed’s announcement. The following days, we did break below this key level, but we managed to hang on to the $112.20 support nearby and closed nicely at $114.80.
SPDR S&P 500 ETF NYSE:SPY Daily Chart
SPDR S&P 500 ETF NYSE:SPY Daily ChartSPDR S&P 500 ETF NYSE:SPY Daily ChartHolding above support at $112.20 and the $111.90 pivot will be very constructive for the bulls as we need to work off overbought conditions if we are to see a sustained move to the upside. I would hope to see some consolidation on low volume for a few days, which would make a nice base for the next leg up. Minor resistance at $115.50 should not be too difficult to overcome and we could easily see $117.70 beyond that.
There is not much in terms of economic news or data coming out this week, with the exception of the weekly unemployment claims and the ISM manufacturing PMI data on Friday. There is also Bernanke who will be testifying on the Frank-Dodd bill implementation on Thursday morning and an announcement in the afternoon. So I would expect that traders will buy the SPY at near the $112 level if possible and regroup for the next push.
This recent breakout took my a by surprise, but the discipline of being able to recognize a change when it occurs and change gears on a dime is what defines successful traders. This market will wreck you if you try to fight it and you need to keep your wits about you if you don’t to get caught on the wrong side of a trade.
Watch out for the $112 level for support in the SPY and $115.50 for resistance.
Happy trading and stay tuned.