The SPDR S&P 500 ETF Trust (NYSE:SPY) was attempting to break up from an intraday inside bar pattern on Wednesday, albeit on lower-than-average volume. The ETF reversed course on May 20, which Benzinga predicted could occur that afternoon. Seven bearish weeks dropped the SPY over 14%.
Volume in stocks and ETFs has been dropping lately, possibly due to the old adage “sell in May and go away,” a term used to explain the seasonally lower volume and liquidity that often plagues the market during the summer months.
Traders and investors have also grown weary of how rising interest rates, soaring inflation, falling consumer confidence and the Federal Reserve’s plan to start quantitative tightening, slated to begin June 1, will affect the stock market.
For the immediate future, the SPY looks set to trade higher due to both the inside bar pattern and the confirmation of an uptrend on the daily chart. Whether a longer-term bull run is on the horizon or if the bounce is merely a relief rally before the next leg down will take some time to become clear.
An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the trend.
An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an "inside bar."
A double or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.
- Bullish traders will want to search for inside bar patterns on stocks that are in an uptrend. Some traders may take a position during the inside bar prior to the break, while other aggressive traders will take a position after the break of the pattern.
- For bearish traders, finding an inside bar pattern on a stock that's in a downtrend will be key. Like bullish traders, bears have two options of where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.
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The SPY Chart: The SPY’s inside bar leans bullish because the ETF was trading higher before forming the pattern and because the inside bar was printing at the upper range of Friday’s mother bar candlestick. Traders and investors can watch for a break of the pattern on Wednesday if the SPY fails to break from the mother bar later on Tuesday.
The SPY’s uptrend pattern began on May 20, when the ETF bounced up from the $380 mark, and was confirmed on May 24, when the SPY formed a higher low at $386.96. The ETF has not formed another consecutive higher low above that level, but when it does, bullish traders may find a solid entry point.
The ETF’s volume was lower-than-average on Wednesday. At press time, trading volume was measuring in at about 44.5 million compared to the 10-day average of 89.47 million. When a stock moves in either direction on lower-than-average volume, the move has less validity and can sometimes result in either a bull or bear trap depending on direction.
The SPY is trading above the eight-day and 21-day exponential moving averages (EMAs), with the eight-day EMA trending below the 21-day. If the ETF is able to remain trading above the 21-day, the eight-day EMA will soon cross above the 21-day, which will give bullish traders more confidence going forward.
There is resistance above at $420.76 and $426.56 and support below at $114.70 and $404.
