The Battle at Resistance Rages On; Will the Shorts Capitulate on a Break?

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Key Points

  • SPY Tops $300 Then Fades into the Close of Trading
  • Speculators Have Remained Net Short as the Market Rallies
  • Cyclical / Reflation Assets Continue to Show Signs of Improvement…
  • ...Materials May Be the Best Opportunity Currently
  • Gold May Provide a Bullish Opportunity in the Weeks Ahead

Action Plan

A close above the top of the resistance zone, near $300, that we have been highlighting in our roadmap for the SPDR S&P 500 ETF opens the door to a move to $311. Interestingly, this is a key retracement level, 76.4% of the February - March decline, but not one that receives a lot of attention. Our mapping of the market now points to this being a likely next stop for the SPY should a break of the $300 level hold. Yesterday’s strong open gave way to afternoon weakness prompting the fund to close near the low of the day.

The fund is now overbought in the near-term as it contends with a key resistance level. One positive for equity market bulls is that SPY is now lagging the IWV (Russell 3000) ETF which points to a broadening of participation in the market’s rally as small names continue to improve.

As we point out below, speculators have remained dogmatically short since the lows were reached on March 23rd. This could introduce additional demand into the market, especially if the $300 mark is broken to the upside.

Given the overbought nature of SPY, a prudent strategy is one that waits for a confirmed break of the $300 level before becoming aggressive on the bullish side of the portfolio while being open to the idea that leadership could be changing as cyclical areas of the market begin to move higher.


The narrative moves on with investors focused on economic re-openings and the path to a COVID-19 vaccine. We have written at length about how while many think that the market is disconnected from the economy, we do not think that is the case. There are many who have remained steadfast in their view that the market must go lower because the economy is in such bad shape. The simple fact of the matter is, the market will go where it wants. There is no amount of hope, reason or logic that will make it do anything other than what it wants to do.

As a group, speculators (large and small) remain net short the S&P 500. They were caught massively short at the March 23rd low, but they have not covered. The 52-period z-score remains below -2 (currently at -2.41). As the index now tests the 40-week moving average (200-day) near 3,013 we have to wonder if a move above that popular measure of long-term trend will induce the a short-covering rally that sends the market to the next stop on the roadmap that we have laid out near 3,110 (lines up with $311 for SPY).

These shorts may prove to be right eventually, maybe the index fails from current levels, but it is important to keep an open mind. This is why we have been providing a roadmap in this note and others over the past few weeks. Price is the guide. Yesterday provided an important piece of information as SPY was unable to close above the $300 price point that has the potential to cause the bears to capitulate. We will continue to monitor this key level along with the 200-day moving average as a guide to the next likely move for the index.

Interestingly, a break above the 40-week / 200-day moving average would be accompanied by near-term participation on the part of the “reflation basket.” These are areas of the market that we would expect to see trade to the upside as investors price in improvement in the economy on the margin, such as Copper, Materials, Industrials and Energy.

At the sector level, only Materials (XLB) does not have a Bearish Chaikin ETF Power Gauge Rating unlike the other sectors in the reflation basket.


Over the past month, while the “reflation trade” has gained traction, the trade in treasuries has begun to come off, especially at the long-end of the curve. While we remain bullish on treasuries as a way to diversify portfolios we do not feel that now is the time to add exposure at the long-end of the curve. At the same time, investors who are not yet exposed to the treasury market may want to consider a fund with a shorter duration such as the iShares 3 - 7 Year Treasury Bond Fund (IEI) which also has a Very Bullish ETF Rating.


The SPDR Gold Trust (GLD) continues to consolidate just below the highs as it leads the SPY. The fund is now overbought in the near-term. GLD is above the rising long-term trend line however, we are not inclined to add at current levels as a better entry point may be possible in the coming weeks.


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