KEY
TAKEAWAYS
- SPY broke down in March, plunged into early April and surged into early May.
- This V bounce is impressive, but it is not enough to reverse the March breakdown.
- A significant increase in upside participation is needed to move from bear market to bull market.
Stocks plunged into early April and surged into early May, suggesting that a “V” reversal is in the making. There are two parts to the V reversal. First, there is the V, which is the plunge and the rebound. Second, there is the breakout move that completes the reversal. SPY fulfilled the V part, but has yet to actually reverse the long-term downtrend.
The chart below shows SPY falling 20% from late February to early April and then surging some 14% into early May. This move created the V as SPY nears the 200-day SMA and the March support break. The blue-pink shading marks broken support turned resistance in the 575-580 area. We also have the 200-day SMA marking resistance here. Thus, SPY is clearly at a moment of truth. A push through 580 would break the 200-day SMA and negate the March breakdown. This would be bullish price action.
There is more to a V reversal than price action. TrendInvestorPro went back and studied four V reversals over the last 11 years. They all feature capitulation and a sharp V-shaped recovery. However, it is upside participation that holds the key to moving from bear market to bull market. We need to see a significant increase in upside participation and key breadth indicators cross specific thresholds. These indicators include the percentage of stocks above their 200 and 150 day SMAs, and High-Low Percent.
This week TrendInvestorPro produced a detailed report and video analyzing the prior V reversals and the key participation levels to watch. Among other ETFs, this week’s reports featured the Cybersecurity ETF (CIBR), the ARK Fintech Innovation ETF (ARKF), the Utilities SPDR (XLU) Bitcoin ETF (IBIT), Gold SPDR (GLD) and DB Agriculture ETF (DBA). Click here to take a trial and gain full access.
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Arthur Hill, CMT
Chief Technical Strategist, TrendInvestorPro.com
Author, Define the Trend and Trade the Trend
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Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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