Friday, December 12, 2008

Key Price Levels On The SPY

In the article "Key Price Levels To Watch" I stated the following:

"Last week's key buying level for the SPY was 86.78. As long as the SPY held above 86.78 on a weekly closing basis, then the rally, which started two weeks ago, was sustainable. Friday afternoon's rally brought the SPY back above this key level. I would become suspicious of this rally if this level (86.78) did not hold on a weekly closing basis."

As of mid morning, the SPY has closed the opening gap down and prices are back above $87. Of course, the close will be important.

Just one word on how to use these levels. As we all know, nothing is ever written in stone when it comes to the market. These key levels have been shown (via the back testing process) to be important areas of buying and selling. They are like road signs directing us to certain price criteria that must be maintained so that the bullish case remains alive. So if the SPY closes above 86.78 today, then I would say that the market is still bullish.
Now I always get this question: suppose the SPY closes at 86.77? This would be bearish (per my methodology) but I can also understand how one might want to wait before closing out their position as it doesn't seem intuitive that positions should be closed out based upon a penny. If that is the case, I would remain cautious, and I would not stray too far from the methodology. Any downside pressure should be considered real.

This approach would be consistent with rules #2 and #3 of my "11 Rules For Better Trading". Be disciplined but flexible!!

Figure 1 is a weekly chart of the SPY and the key price levels are noted.

Figure 1. SPY/ weekly

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