Tuesday, August 27 2013, was a rough day for the markets. Futures sold off overnight after the weak close on Monday. The catalyst for the sell-off was late news about Syria and possible missile strikes which all sounded very apocalyptic. The market fell throughout the morning, and continued edging lower until the final hour, when it found a little stability and closed just off the low of the day.
In past summers, we saw a lot of volatility, which hasn't been the case this year until today. Many remember a few years ago when 500-point Dow down moves were followed by similar up moves. The summertime is ripe for volatility, because volume is low and many people are off doing other things. This sharp Tuesday drop appeared to be a perfect example of a catalyst (Syria news) hitting a low-volume market (last week of August) that has been drifting aimlessly in the 1600s for some time. In that environment, you can expect volatility in both directions as short-term traders take control.
The downtrend since the early August highs remains intact. However, downtrends can get over-extended just like uptrends. With the big Tuesday drop, we find ourselves smack dab in the big congestion zone formed earlier this year. It is centered right around where SPY closed. Heavy congestion is one of the most reliable forms of support, as a lot of value was established there.
Ever since the move out of this area (1620s) around July 4th, technicians have noted the many areas of little congestion along the way upward that needed to be "repaired." If nothing else, this move lower could help repair those areas if the market makes a stand here.
But that's getting too technical, nobody wants to hear about poor highs and things like that. SPY did break through the 100-day moving average (and also the key 50% Fib line), but that doesn't mean they suddenly become meaningless. Even when you break support, if it is only a temporary break, the support can still serve to create a rebound. Don't count this market out quite yet.
The next Fib line is down around 1615. Should the market fail to find any strength tomorrow, that is a likely stopping point, at least temporarily. With the Syria news digested and not much else going on, this low-volume market just as easily could rebound to the downtrend line which it was aiming for just a couple of days ago. That is, if the Syria thing turns out to be over-blown and nothing else bad turns up.
The chart could be forming a massive head and shoulders, with the left shoulder topping out in May and the head the early August all-time high. That's something we will be watching in the weeks ahead.
In the short term, watching for higher lows and higher highs. If such a pattern emerges, many shorts will find themselves "in the hole" and forced to cover, starting a chain reaction to the upside. Otherwise, we might simply digest the downward move and move sideways for a day or two within this congestion zone. A quick move below today's low of 1626.5 would suggest significant further downside.
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