SPY Technicals - Memorial Day Edition

Welcome to summer everybody! Growing up in Miami, Memorial Day weekend was never the beginning of anything. Sure we would go on vacation sometimes with family or friends, but it's summer down there all year around. I've been in New York now for about 10 years and these New Yorkers freak out when the weather gets nice. I've never seen anything like it. Living in Manhattan during the first days of summer is pretty cool. Everyone is outside and no one is inside. My Father is fascinated by that annual phenomenon and laughs when he comes to visit. He loves it.

But before we get on the golf course or boat or whatever is that us market participants do to kickoff the summer, lets see where the market is and what we need to look for this afternoon and next week.

This 134 level in $SPY that we have been watching is coming back into play. Matt Nesto and I were talking about this level on Yahoo Breakout last month, but reiterated that we needed to see some sector rotation for new highs to stick. Well we got the new high above 134 in late April, but no sector rotation to hold it. More on that in a minute. The down-trendline in $SPY comes into play right here at $134 and the original resistance levels from late February and early April are at $134 as well. Therefore this level has become even more critical since we discussed it last month. RSI looks just like $SPY and this area is just as critical. A $SPY breakout should coincide with an RSI breakout above a similar downtrend line and support on RSI is typical of bullish price action. (See here for more on RSI).

So now what? Well believe it or not, we may be seeing the beginning of the rotation out of some of the more defensive sectors and into some more aggressive names, specifically Energy and Materials ($XLE $XLB). The Performance Chart below shows each S&P Sector ETF relative to the S&P500 over the past week. If this rotation continues, then the likelihood of a breakout above $134 increases dramatically. More importantly the chances of the breakout holding improves greatly as well.

Next week is going to be great. We'll have some important market action to watch, the NBA Finals start Tuesday night, the weather in New York City is beautiful, good stuff folks.

Be safe this weekend.

Cheers!