TheSlayer's Market Thoughts

SPY daily chart August 29 2013

Thursday August 29 2013 saw a repeat of the pattern of August 28 2013: a quick headfake lower at the open, followed by a strong grind higher, until a mid-day high was followed by mild but steady erosion. It was a another green day with a green candle shaped much like the previous day.

Higher Lows and Higher Highs

There was at least one huge difference between Wednesday's action and Thursday's, however. We said that we were looking for higher lows and higher highs, and that's exactly what we saw on Thursday. Despite the best efforts of the Bears, they could not bring the futures down far enough to even approach Wednesday's lows at the open, after which the market quickly reversed in the opposite direction. The Thursday higher were about five points higher than on Wednesday. Thus, we saw higher lows and higher highs on Thursday.

A good omen for Bulls was that SPY closed above its 100-day moving average. The market is acting in standard technical fashion, respecting key technical levels such as value areas, and there is no panic or euphoria, and both Bulls and Bears remain energized. That means that we have a healthy market that is going to be two-sided, and there's nothing wrong with that - it's healthier than the alternative.

The erosion during the afternoon on both Wednesday and Thursday simply means that there are a lot of weak hands remaining in this market. A little distribution out of their hands and into stronger hands simply strengthens the Bulls' case, since the fact that the market abruptly reversed and turned higher after Tuesday's debacle shows that the Bulls are stronger in general since the sell-off.

Another positive omen for the Bulls is that SPY keeps taking out downtrend lines and forming what might be viewed as a Bullish cup pattern, as shown on the futures chart below.

Futures ES 4-hour chart August 29 2013

With the weekend approaching, virtually everyone is anticipating a down day on Friday August 30. When everyone expects something, it usually doesn't happen, but that's being a bit too carefree about the matter. Everyone has a load of anxiety these days, induced by the spectre of the Evil September and Syria and Tapering and all that. That said, mild weakness on Friday would have virtually no long-term significance because it is standard procedure for some to close out positions ahead of a holiday weekend, especially one accompanied by as much saber-rattling as is Labor Day 2013. The afternoon after the bond market closes should be particularly dull, with the big action taking place in the morning around the open.

The Bears still have a case, but they have to start making it. The higher the market bounces, the more shorts will hit the exits or change sides. If the market does not drop on Friday, with everything in the Bears' favor, that's a pretty solid indication that the Bulls retain the initiative for now.

Our longer term view is that the markets will continue to recover higher, and nothing that happened on Wednesday or Thursday challenged that assumption. Volatility has increased, which means larger intraday swings, but it is long way from suggesting any kind of rampant fear in the market. More volatility generally is good for short-term traders.

A test of the long-term downtrend line currently at 1672 is not out of the question if things get in gear and we get some good news. Markets in the past usually reacted well to US missile strikes against defenseless countries, at least in the intermediate term. A peaceful resolution would probably be the best for the markets.