TheSlayer's Market Thoughts

SPY Daily June 4 2013

While the daily chart doesn't reflect it, Tuesday was full of crazy volatility. We were looking for continuation of Monday's late strength and got it, with futures working back up to about 1650. Then, we ran into the downslope from May 22 and sold off. The Monday low held, though, and a late bounce  almost led to a green close. It was a week's worth of moves in one day. Everybody is talking about this being the first down Tuesday after 20 straight up Tuesdays, but that had to happen eventually.

Several takeaway lessons from today. Letting positions ride unattended is not a good idea with this normal summer volatility. The downtrend from May 22 was confirmed, validating a descending triangle that in hindsight began on that day. Regardless of where they form, descending triangles are bearish patterns that indicate distribution. Our outlook thus shifts to Bearish until proven otherwise. When the market speaks, we listen.

We are left with a choppy trading range until the futures break out of the descending triangle. The more the futures challenge 1620, the less likely it becomes to hold. A break to the teens will energize Bears and discourage Bulls and almost certainly lead to a test of the bottom of the major uptrend channel at 1600. A break higher out of the triangle is more likely to be a Bull Trap than anything else, and shorts would be all over such a move, as usual, but with renewed vigor.

So, the outlook is cautiously Bearish in the intermediate term, but longer term remains Bullish as long as we remain in the major uptrend channel. Short term, watch the 20-period moving average on the 5-minute chart. Overtrading and getting whipsawed is your biggest danger during the summer. Watch the Nikkei, it rebounded slightly last night, and continued strength there would be a Bullish harbinger for the US equity markets.

S&P 500 E-mini Futures 4-hour chart

It isn't pretty, but the downtrend off the May 22 high helps confirm the impression that we are deep into a topping pattern.