50 Shades of Grey

Haven't read it.  It's referred to as 'mommy porn'.  I'll wait for the 'daddy porn' version. Although the 'The Fifty Shades of Gay' parody sounds amusing.   As I mentioned in my last post we were expecting a move to the 50 day moving average (dma) to act as support.  Now the logical question would be why is the 50dma important? Why would it act as a support and resistance area?  Who knows and really who cares.  What is important to understand is that it is widely used by many investors and analysts.  My goal is to find significant levels of support and resistance and analyze the activity around these levels using volume to better understand what price has and may potentially do.  I view the 50dma as a freebie.  It's readily available and we know its an important psychological level for many traders (except for those clever folks that think using a 51dma somehow provides a trading edge).  We also know that many traders will place stops (both buy spots and stop losses) in and around the 50 dma.  So do the professionals who will use that to their advantage to shake you out of your positions by running your stops and buying when you are selling and selling when you are buying.  Yes, its a conspiracy theory!  Where is Jesse Ventura when you need him!

With this in mind lets take a look at what happened today with the SPY.  In our previous post we identified $162.80 as a level of broken support which lead to us anticipating a move to the 50dma which was at $160.48 as of yesterdays close and rising.  As you can see from the 5 minute SPY chart below the amount of volume increased considerable when price reached $160.48 (blue line).  What is especially interesting to note is the bar at 12:25am when price broke below the 50dma on significantly higher volume but price closed near the highs.  If I had to guess I would say that the stops where taken out and the small guy was selling (getting stopped out) to the big guy that was buying.  Remember the definition of support is where demand overcomes supply.  Volume represents the level of activity of demand and supply  The price closing above support with the hammer candlestick and high volume all indicated bullish behavior.  

Again, I would have waited for confirmation of the $160.48 support area by waiting for a successful test before initiating a long position.  Why?  Because I've found that at areas of significant support and resistance area there will always be test of that level on one of the lower time frames.  I believe the test is a way of confirming that the remaining supply (demand) has been removed represented by lower volume on the way down (up) to test the support (resistance) area.  This is exactly what happened 30 minutes later at 12:55am when price came back down on significantly lower volume to test the $160.48 area of support before rallying.  Pretty interesting I would say.  What is even more interesting is how price closed just 7 cents shy of the $162.80 resistance area!  Someone call Mr. Ventura ASAP!!!

Thanks for reading.