TheSlayer's Market Thoughts

SPY May 23 2013

First, I want to say that I do this for a living, and I don't post charts to pat myself on the back. I couldn't care less about that. It's about making coin and trying to form something coherent out of sheer chaos. My belief is that the individual trader is way outgunned by the robots and the programs and the instant access of the large brokerage houses. I think something should be done about that, but that's a rant for another day. We should try to help each other.

As I was thinking a couple of weeks ago, we did get to the vicinity of 1700 - ok, it was 1690, hate me for being off by 10 points, but that's close when I was saying that around 1630 - and then pulled back. Yes, we just had a big, scary pullback, just as they all are (actually, I expected a lot worse). Our goal now is to try and figure out what it means.

First, all the underpinnings of the previous move higher remain intact. QE in the US remains in place, QE in Japan remains in place, the Europeans are still looking for a way to join in so as not to get left behind. Nothing that Chairman Bernanke said yesterday was particularly new, and we already knew that not all the Fed Governors approved of all this stimulus. "Tapering," the new buzzword, is inevitable, just inventing a word for it and saying it will happen doesn't change the current reality.

Since the fundamentals haven't really changed, we are free to do a pure chart exercise - that's what charts are for.

Note (in the chart above) that we got to the top of the steep new uptrend channel and pulled back. I wouldn't put it past the programmers on the Street to have put that specific topping number - 1690 - in their robots because it was a nice round number and also the top of the channel. Prices got there, and the sell programs kicked in. No, I don't have any proof whatsoever that was the case - it's just a hunch.

We pulled back to the bottom of the new uptrend channel yesterday, then this morning broke below the bottom of the channel. That's pretty typical, how else are they going to scare you out if you're long? The mighty channel has been breached, run for the hills and stock up on water and canned ham! The important thing, though, is that the market sold off, as everyone expected, but then bounced, right back to (in the futures) 1650, where we ended the day.

What does today's bounce mean? I will give you two hypotheses:

1. It was the usual buy-the-dip crowd. In the past, they stayed on the case relentlessly and drove the market to new highs from there.
2. It was merely a Fib bounce, a "dead cat" bounce. I drew that out on the chart below (note that it's the futures).

S&P Futures (ES) May 23 2013

This is the point where you have to do some thinking. In normal markets, we would get the dead cat bounce and then roll over. That's why the Fib Retracement theory became popular in the first place. It worked. In the chart above, we didn't quite get to the normal 50% level today.

This isn't a normal market. Every single big, scary dip has been met with serious buying after a day or two or three. As I noted above, all of the previous fundamentals remain in place. So will this time be different? We could go down again tomorrow as a re-test, and still bounce back up. I'm not predicting that, and don't expect it, it's just a possibility.

You decide for yourself. I'm hardly infallible (geez, I wish I was), but I expect to see more new highs. I would look at today's low as the key level. Break that, we head straight for the 1500s. Otherwise, higher.