A Bearish SPY Perspective (and Apple Update)

Sunday, September 22, 2013 (6:00pm)

It’s been a while since our last post. We’ve found it to be more efficient to post our views and thoughts in real-time on Twitter (you can follow us @three28capital). We’ll start posting here again from time to time.

APPLE. After rallying over $120 points in just six weeks, Apple spent a few weeks consolidating before eventually gapping down on news that the iPhone 5c wouldn’t be the “cheap” iPhone everybody was hoping for. It blew through the 10, 50 and 200 DMA’s, but found firm support at the 100 DMA. Since hitting $448 last week, the shares rallied $30 to re-take each of those moving averages. It’s now sitting firmly at the 50 DMA (just below the $468 level).

We’re expecting a press release before the market opens tomorrow to announce first weekend sales figures for the iPhone (both the 5c and 5s will likely be consolidated into a single, round number). With the shares sitting at the 50 DMA, this number will be the determining factor behind whether the shares drop – and likely re-test or exceed the $448 low – or rise and re-test the August highs.

One thing we’re watching closely is the potential inverse head and shoulders pattern that has been forming over the past couple of weeks. If the shares bounce up to the $475 level, we fully expect $505 to come quickly thereafter. It will really depend on the number released tomorrow.


S&P500. We have a much more bearish viewpoint on the broader market in the medium-term. After the Fed choose not to begin the process of slowly unwinding the stimulus, the market shot up, creating new highs. However, the percent of stocks making new 52 week highs continues to decline. That percentage is measured by $BPSPX (bottom of chart below). During each of the three successive bumps higher in the SPY, the BPSPX has made lower highs.

Furthermore, at this new high SPY print, the NYMO went into extreme overbought territory (red line at the top of the chart). The last time we saw both of these occurances at the same time (BPSPX negative divergence, whereby it creates lower highs as the SPY creates higher highs, along with an extremely overbought NYMO) was during August 2011. See the chart below to see what followed.


VIX. Additionally, these two strong bearish signals (one nearer-term and one medium-term), are joined by the fact that the $VIX (market volatility) is reaching its long-term support line. This suggests that volatility will rise and the market will fall.


SPY RISING CHANNEL. Lastly, here’s a look at the long-term SPY rising channel. Aside from a few quick bounces outside this channel (which lasted for only short amounts of time), the SPY has been relatively well-contained within its borders. Recently, however, this three push-up pattern (blue) has become more clear. A steep, two-legged decline is likely to follow.

SPY Channel

If this three push-up pattern were to fail, however, the top trend line currently sits at $175 – meaning that the upside right here is already limited. It’s important to consider both upside and downside potential when looking to take a position in the broader markets. At this point, the upside looks fairly limited, while the potential for downside is becoming more and more open. We’ll continue to update our thoughts as the market progresses.