Time For a Bounce?

The market fell today with SPY, a ETF proxy for the Standard and Poor's 500 index, fell 1.51% to 187.64.

I had been anticipating a harsher sell-off, testing the lows seen last Wednesday but the selling was moderate.

This is a common formation in my analysis.  I am always looking for 3 period tests of various time frames.  This is not to say that sometimes it doesn't go to four periods.  Or sometimes, the desired formation does pan out at all.  But as a trader by nature, I am always looking for some kind of pattern that I recognize to give me confidence to enter a trade.  Today's move gives me some confidence, on the short term. 

Should the rally begin, I would expect price to pierce the 20 day moving average, just as it has been doing during the past rallies.  Price could rise to 195-196.  Where we go from there, who can say? 

This indicator, which I call Size, appears to be reversing.  Still it's at a very high level but the reversal signifies that price will probably regress to the mean, which in this case, is the 20 day moving average, shown above in the price chart, and the target for price to move.

Another view that is of interest is a longer term daily line chart.

While it may not be too obvious what I am seeing here, price came down to the neckline and held above it.  A breakdown below this line will result in quite a nasty down move.  The target low should this occur would be around 160, or about 15% lower from where we are now. 

So the rule to follow in a downtrend is to sell the trendline.

Important support levels will be watched for over the next two Friday closes.  This coming Friday, the last trading day of January, I'll be looking for a Four Month test of the August low at 191.61.  The following week will be a three week test of January 15th's close at 187.81.  If we maintain support over these next two weeks, a substantial rally could happen.  But for now, longer term trends are pointing lower and frankly, should we get to 195-196, I'll be adding more Puts, expecting the market to break through the neck line and head for the 150 level.  I'll be buying more time, probably buying June or September puts.