This S&P Technical Indicator Points To Major Bottom In The Market

Finding and trading patterns is an essential skill you need to have as a trader and exploiting them so that you can make money is even more critical. Chart patterns in all time frames have a tendency to repeat themselves. It doesn’t matter the conditions of the market, human behavior tends to be pretty reliable at least most of the time.

Investors and traders alike eye this market to see if there is a bottom. Look at the $SPY chart going back to the fall of 2011 and there is a very simple and powerful pattern that emerges. Why 2011? Because it was the last time the $SPY saw volatility similar to what we saw recently in October and the MACD pattern is almost identical to the 2011 debt crisis. The question that needs answering: is now a good time to trade the bottom?

To determine this, we looked at the major reversals in $SPY the last 4 years and used a very simple criterion:

1. Is the MACD in an extended area between -1 & -3 or lower?
2. How long does $SPY take to bottom?
3. What are the reversal characteristics (price action & volume)?
4. How long and how big were the reversals?
Since 2011, there have been 7 reversals where the MACD was at -1, as you can see on the chart.

During those 7 reversals where the MACD was at -1, the SPY would spend an average of 5 days bottoming on about 203M average volume to then reverse with an average move up of 9.8 points or 5.9% that would last about 12.1 days.

The price action or candlestick typically was a spinning top, a bullish engulfing, or a long tailed Doji, which indicates that the bears would sell off early and the bulls would make a comeback at the end of the day.

5 reversals came when the MACD was at or below -1.5 and in those situations, the $SPY bottomed in about 5 days with the volumes averaging about 292M. The reversal averaged 15 points higher in roughly about 18 days.

Out of the total 12 times when the $SPY chart had a MACD reading below -1, it bounced and was a usually a significant move. Today, the $SPY is sitting at -2.9 on the MACD with average volume at 212M and the price action showing that $SPY is holding some support.
Today’s closing action will continue to let traders and investors know if a bounce is on the horizon, which I believe it is. But if we see shorts come in towards the end of the day breaking $192, the $SPY would eventually hit support at $187. Either way, I believe a major reversal is on the horizon.

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