Thursday, August 15, 2013

SPY August 15 2013

SPY August 15 2013

The markets sold off on August 15, 2013, hitting levels they had not seen since July 11, 2013. SPY sold off hard right from the open and bottomed out about 40 minutes into the session. The rest of the session was basically sideways chop with a succession of bounces that were quickly sold off. The lows of the day were hit during the afternoon, and the close was near the lows of the day. The old uptrend channel is now history, the market is now simply choppy and indecisive with a downward short-term bias.

Overall, it was a big rinse. The Bears were in control, and 1700 now is a distant memory. After all the sideways action over the past two weeks that took us nowhere, it was clear that energy was building for a break one way or another. The outcome was downward, and there were some hints this might happen that we pointed to yesterday. Hopefully, longs lightened or terminated their positions before the big drop this morning, in which case they could watch today's sell-off with equanimity, play shorts if that's your thing, buy the dips after the first hour, and generally have a pretty good day watching the carnage and subsequent chop.

The danger is to think that there will be an immediate bounce-back after a day like this. That can happen, but the probabilities suggest at the very least a little consolidation in the futures in the 1650s region before the tone changes. The real congestion/support is in the 1630s, then in the 1610s. You want to buy into weakness, but patience is required if you want to make real coin on the bounce back up. Today's sell-off was a bit too orderly to be a real, panicky type of bottom. We keep saying this, but it's important: September is the weakest month of the year for stocks.

To the upside, 1666 on the futures is the key level. It was not breached after the drop today, challenged but never touched. A move above that which is not a feint that is immediately sold off is a potential signal to go long. Shorts would likely cover above there, and we would get some hot money along for the ride. A quick ride up to fill the gap is among the more likely outcomes.

To the downside, we watch, first, today's low at 1655.25, and second, a drop below 1650 in the futures. If selling develops momentum, more and more traders with big profits will start to believe this sell-off and prepare for paying their bills for the coming school year while they still have a little change in their pockets. The more time ES spends down in the 1650s, the more likely we see more downside. A rip back up at some point is likely, because that's been the pattern, but the probabilities say we get at least a quick, scary death ride lower first.

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