Chart of the Day – Where is the Strongest Support in $SPY?

by Enis December 5, 2013 6:58 am • Commentary

Yesterday was the first roller coaster price action in the broader indices in quite some time.  It was the largest intraday range for the index in several weeks, and the VIX hit its highest level in more than a month.  With volatility potentially picking up, I wanted to look for the areas of strongest support on the downside as a planning exercise in case a market correction (surprisingly) takes place over the next few weeks.

I checked this morning to see what the Volume Weighted Average Price has been in the SPY over the past few months.  I tweeted out those levels as follows:

1 month VWAP in $SPY is $178.75, 2 mth VWAP is $175.08, 3 mth VWAP is $173.03. Those are levels where avg purchase goes from winner to loser

While the uptrend in the SPY has been strong all year, I was surprised to see that 1 month, 2 month, and 3 month VWAP were all within 4% of the current level.  In that vein, I’ve drawn the 173 to 175 area on the daily chart as the crucial confluence of support in the coming weeks:

SPY daily, 200 day ma in black, Courtesy of Bloomberg
SPY daily, 200 day ma in black, Courtesy of Bloomberg

The area marked by the two green lines is my bull/bear pivot until the end of 2013.  Bulls can probably stomach another 2-3% correction without much holiday indigestion, while much more than that could lead to a more panicky state of mind.  On the other hand, bears are likely to remain quite timid after a year of false breaks, unless a deeper correction below that area develops.  More important long-term support is at the rising 200 day moving average around $165.  SPY has not traded below its 200 day moving average for more than a year.

Of course, SPY could just zoom to another new all-time high into the end of 2013, as many expect.  Though there are some warning signs (in Europe, in Japan, and in commodity currencies), the S&P 500 has shrugged off such warning signs all year.  Regardless, if the correction does play out, I will be very curious to see the reaction in 173-175 in SPY.