Projection of a worst case scenario for SPYGiven the tensions building up in Northeast Asia right now, it set me wondering if a rise in volatility just might thwart a very nice possible recovery and plummet us into the next bear leg. Being the devil's advocate on this idea, I wiped out the drawings on the SPY chart, and looked at only a "worst case scenario" or at least a "bear case scenario".
Note that given the week has not ended, the current candlestick is not to be accounted for in the assessment, and remains a projection until the end of the week.
Clearly, in the SPY weekly chart, the immediate impression is that the bounce rally is indeed well underway and technical indicators are bullish with a synchronous crossover.
However, the meeting of the weekly 55EMA (orange line) in a period of expected increased volatility, and geopolitical "Pelosi induced" tension... the SPY may just fail the 55EMA. IF this happens, then the bear case scenario projection might just play out.
We need to note a few things...
The SPY IS BELOW the 55EMA (roughly equivalent to the 200SMA) so technically still in bear market;
There is not yet a weekly higher low to mark the end of consolidation and the accumulation phase for launch;
There is at least a 50 point wide range on the SPY to clock the higher low (bull case);
The SPY has NOT YET clock a higher high (need to break above the green line, and 55EMA); and
The trend change pattern of a series of lower highs and lower lows (waves 1 to 5 in drawing) is not yet complete, nor is the pattern broken.
On the last point, by not breaking above the 55EMA, the SPY would not have broken the pattern, and would not be out of a technical bear market. Furthermore, it would then be looking for one of two scenarios:
To make a higher low, or to make a lower low.
In the latter case, IF and when it breaks the critical support of the last low (the red line), it would then drop significantly in the last leg... currently immediate support at 325. This is a good 20% down from where the SPY is today.
In summary,
Watch the SPY very closely over the next few weeks. A failure to clear the 55EMA would put it at risk to clock a lower low or higher low. Breaking down the critical support would see further slides.
IMHO , the current headlines speaking of the Pelosi-Taiwan visit is key. It is the seed of what tensions are to come in the weeks following. I would not disregard the "face value" of the Chinese. It goes really beyond superficial levels, that is Chinese culture.
For now, only time will tell... stay ahead of the curve and stay safe!
