|SPY June 26 2013|
SPY moved slightly higher on June 26, 2013. The E-mini futures briefly crossed the 1600 level before pulling back. We did not see the insanely strong buying surges of the recent uptrend. Rather, it was a more standard slow grind higher that, as on June 25th, developed fairly late in the day and also suffered a slight pullback at the very end. As usual recently, the overnight futures captured most of the day's gains, with the trading during the day restricted to a tight range. There was enough volatility intraday to do daytrades, though.
Weak GDP numbers in the morning did not phase the market at all, with only momentary selling of the futures. It is worthwhile to ask why, four solid years into a recovery, the numbers are so weak, especially considering the extraordinary lengths to which the Fed has gone to prop up the economy. That's not a political question, it is an economic one - what gives? Those of us who can remember the economic recoveries of the past, say, of the 1980s, can only scratch our heads and wonder what has changed so much in the last few decades that a four-year-old recovery can't manage better than 1.8% GDP growth.
The reaction to the GDP number seemed to be a return to the typical "bad news is good news" interpretation, where bad economic news helps stocks because of the hope that a weak economy will prolong the QE program. The Fed, though, is doing everything it can to discourage that type of thinking. It now is hinting that 7%, not 6.5%, is the magic number for unemployment, which will induces the Fed to taper and eventually end the QE program.
What the Fed doesn't seem to get is that it isn't the actual QE buying that buoys market confidence, it is the reassurance that "daddy Bernanke" is there to backstop the market. That reassurance removes the key element of fear to the downside that has propelled the market higher, giving anxious buyers eyeing a dismal economic recovery the courage to press the buy button without overblown fears we could fall right back to 1200. The Fed is trying to kick that remaining leg of out the stool away, but today's action suggested that nothing short of a blunt "QE is over" will do the trick. Some traders wish the Fed would just shut up and go away and let the market seek its natural level, wondering what the Fed will do just adds an element of uncertainty to things. But there's no question QE brings in buyers - who will be hurt when the Fed changes course, of course.
A megaphone pattern may be developing. If that is the case, we may have more short-term upside before running into true resistance. In the longer term, though, megaphone patterns are considered Bearish. This one could be part of a long-term topping process. We'll see how the market reacts when it hits the upper channel, it's just one of may possibilities.
Below is the E-mini futures 4-hour chart, with a Fibonacci Retracement drawn in. Note that the recent bounce has been V-shaped. This is a standard reactionary formation, V-shaped bottoms are usually not considered long-term foundations. Also, note that today we ran up and touched the 50% Fib line, then backed off. This doesn't mean we can't surge higher - SPY probably will continue and complete the cup - but it is one of those levels that traders obviously were watching. The late surge and subsequent selling were probably a result of alert traders having these levels programmed into their charts and playing them like corner shots in a game of Billiards. You may not believe in the Hocus Pocus of technical analysis, but others do, and the fact that they do does influence intraday moves.
As usual, the market leaves us in an indecisive place. Having recovered 50% of the recent selling, SPY has now completed the follow-up to that move and has a free hand. While some have pointed to the abrupt bounce off the bottom as being simply a dead-cat bounce, others note that it reflects the gradual process of traders regaining their confidence after the recent Bernanke hit on the market. With so many traders scared and now more convinced than ever that the market is just one big house of cards waiting to be blown over, the moves higher from here are likely to be grinds rather than the epic leaps of April and May. That is more standard market action and provides a more secure foundation for future moves, since there aren't as many air pockets that need to be retraced and filled in. It isn't as exciting, but it is less dangerous.
The bottom line is that we are mildly Bullish at this point. A sustained break below 1580 would be Bearish, a move back over 1600 and holding there would be healthy and Bullish for the market, more healthy than a quick dash back to the 1620s.
|E-Mini Futures on June 26, 2013, 4-hour chart|