March Madness Sees The S&P 500 Master The Art Of 'The Head Fake'

Legendary UCLA basketball coach John Wooden used to teach that in basketball a fake only works if you sell it. You have to commit to a direction in order to get your opponent to react and give you the opening to go the other direction.

In that regard, the S&P 500 seems to be an excellent point guard, creating multiple fakes that are keeping investors off balance.

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The Commitment To The Undercut

Consider the State Street SPDR S&P 500 (SPY) exchange traded fund. It tracks the S&P 500, allowing investors to gain exposure to the index of 500 stocks with a single trade. Earlier this year it came down right around 678 twice (1) then quickly recovered.

The third time it happened, buyers came in immediately and pushed SPY higher by the end of the day (2). We went with a leveraged position in ProShares UltraPro S&P 500 (UPRO) to gain quick exposure on SwingTrader after a follow up to the favorable upside reversal (3). Even when we have a leveraged ETF like UPRO, we always use the non-leveraged instrument to do our analysis.

The S&P 500 didn’t go up immediately but it did start making progress enough to get back above its moving average lines. A big problem was that it couldn’t stay there.

Once SPY fell back below our entry point, we exited the position (4). Even the day of our exit closed well off its low but still under the moving average lines.

Then the next day, the S&P 500 fell further early in the session after the market reacted to the conflict starting in Iran (5). However, by the end of the day it was well off highs and back in positive territory on another upside reversal. We went with another leveraged position but dropped it from 3x down to 2x with the ProShares Ultra S&P 500 (SSO).

Again it didn’t stick. SPY fell sharply the next day and undercut all the previous areas of support around 678 (6). It certainly seemed like a commitment in direction at the start of the day and was enough to start a wave of selling, including an exit for our position.

By the end of the day it ended up being another head fake. The S&P 500 closed well off its lows and back above the area of breached support.

The Problem With S&P 500 Lately

The shakeouts and upside reversals seem to be the current personality of the index. But the danger is that the levels of support keep getting lower and the areas where the index fizzles out keep getting lower too.

After the S&P 500 highs got turned away from its 21-day line, the index fell sharply below 670 only to turn around and finish with another upside reversal (7). The rally only lasted a day before it started turning direction and undercut its lows again a few days later (8).

With SPY breaching 660 on Thursday (9) and closing right around its 200-day moving average line, the area of support at 678 is starting to look further away. All of the undercuts and upside reversals seemed to shake investors out only to go higher. Now it seems that the upside reversals, not the undercuts, were the head fakes after all.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.

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