The Day the SPY Didn't Bark

SPY daily chart August 28 2013

SPY opened weak after indecisive overnight trading. After giving a swift peek slightly below Tuesday's low, it abruptly reversed and headed higher. Once futures crossed 1630, they did not drop below there for the remainder of the day. After hitting the high of the day in the early afternoon, choppiness followed, with a moderate sell-off into the close.

First things first. This is a case of Sherlock Holmes and the barking dog. Most folks know that story, about how Holmes investigated a murder with no good suspects. However, he did know one thing: a dog that always barked at the sign of any intruder hadn't barked the night of the murder. This, of course, solved the case by identifying the one person the dog wouldn't have barked at. It is one of the more famous Sherlock Holmes stories.

The non-barking dog here was the absence of a continued sell-off. If traders really were fleeing for the hills ahead of some apocalyptic images of conflagration in the Middle East, or they simply finally (and way too late for the taste of perma-bears) came to their senses and realized that the US economy has become nothing but a hollowed-out Potemkin Village (sorry, I'm in a literary mood today), you would have expected the reverse of what happened today: a quick failed peek higher, then a slow grind lower. That the markets eeked out any gain today was nothing short of miraculous after the Tuesday rout.

Since that dog didn't bark, we were left with a cautious move back over the 100-day moving average as more and more traders who actually are worried about Syria left the table and sold their shares to stronger hands. Bears will point to the final-hour sell-off, during which the VIX climbed back off its lows of the session, but even that was hardly inspiring or particularly notable.

One can talk about dead-cat bounces, and that might be what happened today. But there was a lot of technical damage to the Bears' case today, despite the late weakness. If you draw downtrend lines from the recent highs, today's action smashed through all of them. The formation developed yesterday and today looks suspiciously like a double bottom when you include the overnight session (as I always do), as shown on the chart below.

Futures chart August 28 2013

This is not to say that we can expect to see 1700 again any time soon. However, if the market holds steady and the fools valiant leaders in the worlds' capitals can hold it together and find a way to resolve their differences without lobbing missiles at each other - at least during trading hours - the market appears a lot firmer than it did at any point yesterday. At the very least, it could go either way, which was not the common sentiment yesterday, with a slight bias higher.

So, yes. Cautiously bullish, though everything is against the Bullish case right now, including Syria, Labor Day, September, and the recent weakness. Keep an eye on today's lows, if they don't hold for any length of time during the cash session all bets are off, with the caveat indicated below.

Chart of the Day

Josh Brown, a well-known CNBC personality, distributed the below chart today that was prepared by Jonathan Krinsky of Miller Tabak + Co in New York. Tuesday saw 92% of New York Stock Exchange stocks have declining volume. That is pretty rare, and only occurred on the days shown during the past year.

SPX chart with days of 90% NYSE volume in declining stocks indicated

The takeaway appears to be that such days are blow-off type days to the downside. Note that those days weren't the actual bottoms (neither was yesterday, today's low was lower), but they were within a few days of that bottom each and every time during 2013. So, even if there is some lingering carryover weakness this week despite today's robust recovery, that doesn't necessarily imply that we are headed straight back down to the 2009 lows. Instead, it may simply be part of a typical and even routine bottoming process.