|SPY Daily chart on July 18, 2013|
It was a positive day for the market on Thursday July 18, as SPY broke through resistance and spent most of the day in the 1684-1687 (futures) area. SPY set a new all-time high, following in the footsteps of most of the other major averages.
Ben Bernanke gave his annual Humphrey-Hawkins testimony to Congress, but it was a non-event as far as the market was concerned. Early strength did erode during the afternoon, and after the bell some weak earnings from MSFT and GOOG, along with the announcement that the automotive town of Detroit, Michigan had filed for bankruptcy protection, sent futures lower.
At first glance, the negative after-hours new suggests a hard down day on Friday. That may well happen, as it would be the obvious result of bad news and perhaps some desire to take profits at a new high. We need to be prepared for anything, though.
Things to consider going into Friday:
First, this is a peculiar market that is not solely driven by earnings and economic data. You may laugh and say, well, all markets are driven by earnings and data. That is true to an extent, and was the case i the past, but maybe not so much now. GOOG and MSFT reported weakness, but neither is about to go out of business, and neither has quite the following of Apple. MSFT in particular hasn't been a real bellweather for years. Instead, this market is being driven by the Fed and QE. If you know that the market is likely to keep rising in general until QE ends, isn't buying a nice, fat dip a prudent course of action? We could see a surprising amount of buying enthusiasm tomorrow or perhaps on Monday as traders position themselves for a month or more from now. Any dip would be welcomed by traders shut out until now by constantly rising prices. Who is smarter, the one who sells, or the one who buys and holds through the pain until SPY recovers?
Second, the Detroit bankruptcy is not a surprise. That has been on the radar screens for years. The bankruptcy of Harrisburg, PA had no discernible effect on the market, and it's a pretty big town, too. The market moves in reaction to surprises, and there's little of that regarding Detroit.
Third, the SPY remains above its trend line. There is decent support in the 1670 region. An extended break below that would be Bearish and probably send the market tumbling.
Fourth, the 50-day moving average is at 1630. SPY is about 50 points above there, which is an extreme gap that usually doesn't last too long. That wide of a gap invariably closes, one way or another. Should the market make it that far down, it would provide a nice base of support. It could also close by time, though that would take a while.
Fifth, the market may just need an excuse for a breather. A moderate pullback here, now that the new highs are in place, would recharge the market's batteries for more gains. Further gains are likely at some point due to QE and general market momentum.
Sixth, a break below 1670 would snap the current uptrend channel. It is just as likely that buyers will be laying in wait to resume the uptrend. On the other hand, more sellers will appear if that level fails.
Seventh, Friday is options expiration day. Anything could happen.
We'll see what develops, but any correction is unlikely to last more than a few days, and maybe not even that long. Will be staying prepared for any buying surges that seem to pop out of nowhere. My point is, just because futures drop doesn't mean the end of the world. We easily could see surprising strength on Friday, especially as the day goes on, that would confound just about everybody.