TheSlayer's Market Thoughts

SPY daily chart, July 24, 2013

There was a bit more excitement during the trading day on Wednesday, July 24, 2013 than has been the case recently. After opening around all-time highs after a run higher overnight, the market sold off steadily through lunchtime. It then bottomed out and formed what Bears were hoping was a Bear Flag, and Bulls were hoping was the bottom. At least for today, the Bulls were right, and a sharp bounce in the final few minutes of trading recovered about a third of the day's losses.

The chart shows that the narrow newer uptrend channel off the lows was finally breached. It remains to be seen whether the older uptrend channel now will take over again. The rapid pace of advance off the lows was unsustainable in any event, so it is almost with a sigh of relief that Bulls no longer have to worry about that parabolic secondary uptrend channel.

The big news overnight was the Apple (AAPL) earnings. They were solid, but not spectacular, and AAPL traded several percent higher throughout the day. The Nasdaq Composite was conspicuously strong today as a result. However, the broader market was not pulled higher in Apple's wake and instead seemed to be looking for an excuse to sell off early in the day. When the market wants to find an excuse to move, it invariably will (some might remember a huge rally that developed after an Apple earnings report in 2012, on similarly tenuous grounds). Probably the most interesting comparison was the difference between today's weak action, after a leading company reported solid earnings, and the strength that was shown last week after Microsoft and Google both missed. Other earnings, such as by McDonalds and AT&T, just seem to be ignored by the broader market. Just reinforces our belief that this market is not earnings-driven, and in some perverse fashion simply disregards earnings. Why? Who knows, but the market's reaction to important earnings releases this quarter has been peculiar to say the least.

If you were watching the action closely, there were a few clues that the day's sell-off was not likely to develop into Armageddon. The sell-off was not especially panicky, without high volume (though volume did pick up a bit over the previous few lackluster sessions) and the selling lost its momentum once the futures dove into the high 1670s. It was all very orderly, and almost resembled an overnight sell-off that typically goes nowhere. After the futures nudged to a new daily low around 1:00 EST, that low held for the rest of the day, though it wasn't obvious at the time that it would. Market internals such as the advance/decline figures and the TICKs were all weak until after lunch, but they were not so weak as to suggest full-scale liquidation. The TICK picked up after lunch and was a good tell that the market wasn't going to completely roll over.

One other factor should be borne in mind: the actual highs in the futures have occurred during the overnight session (last night's highs were never matched during today's action). That is unlikely to remain the case - the usual outcome is that lasting highs are hit during the cash session, not while almost everyone is sleeping. There are no topping tails, nothing resembling a topping pattern yet on the chart. That is another factor militating against a Bear Market suddenly developing until upside issues are resolved.

There were several rumors and news items today to support the Bearish case, none particularly noteworthy or important. If anything truly serious had happened, SPY would have made new lows after the mid-day bottom, and closed at the lows. When we see a real sell-off, that is what you can expect - low after low after low, not a rapidly diminishing rate of decline and finally a bottom that holds, especially one made at mid-day that holds through the close. The late-day surge showed that the Bulls remain firmly in control for now.

Thus, if you were adventurous, the day turned into one of deciding if you were brave enough to take the chance that, indeed, the bottom was in and there wouldn't be a late-day sell-off. That the bottom actually was in didn't become obvious until the final few minutes of trading because of the sideways action throughout the afternoon, but once it did become clear, buyers emerged from their "places of concealment" before it was too late. That is one hidden benefit of all these ramps up during the overnight session - many Bulls are frustrated at not being able to participate in the overnight gains and thus buy late in the day in anticipation, which helps keep the rally going. The Bears likewise fear the overnight sessions and cover late in the session even when they've won the day.

As a general matter, with all this choppiness in the upper 1600s, it appears that SPY is pulling itself together for an eventual run through 1700. The run through the 1600s has been fairly quick by historical standards, and it is asking a bit much for SPY to just cruise to new highs every week, especially during the summer. This consolidation in the upper 1600s is forming a base for future advances and, if you really look far ahead and believe in the rally, it also is forming a support area for future pullbacks. Whether we see further pullback now nobody can say, but the failure to drive lower today than was the case was a good sign for the Bulls.