TheSlayer's Market Thoughts

SPY daily chart August 20 2013

On Tuesday August 20, 2013, the market started off strong, reaching a peak at 1:00 EST. After that, it pulled back a bit, chopped sideways, then broke lower in the final half hour.

The day was all about key support and resistance levels. After finding support at the 38.2% Fib level, SPY moved higher until it ran into the 50-day moving average around 1656 - which also happened to be a congestion zone. After being rebuffed there once, the Bulls gathered their forces and snuck above that level, but the surge didn't last long at all. After that, volume declined until final there were no buyers left and futures fell 5 points.

There's a danger in reading too much into intraday movements as a read on the broader direction. SPY failed at a key resistance level, and then some news come at late in the day that encouraged sellers. That often happens when the "common wisdom" is that the market should go one way or the other - news that helps the market close in that direction just happens to appear late in the day. Go figure.

Looking at things a bit more broadly, however, Bulls should be encouraged by the day's trading. It was a weak bounce, and a weak-looking candle, for sure; but that is how several big rebounds have started. The initial bounces on February 26, April 19, June 25 and several other turnaround days this year weren't very impressive, either. They all ushered in strong moves higher in the days that followed. On the Bearish side, there was the late-day weakness which has become fairly common recently to give encouragement, and the fact that overall it was a fairly tepid bounce off of oversold conditions and on declining volume throughout the day until the final sell-off.

Which is not to imply that the market is going to surge to 1800 any time soon. It is simply meant as a kindly suggestion that nobody should get complacent about where this market is heading, because it is giving conflicting signals all around. Very slight edge to the Bulls after today.

Some of us were posting during the day on Twitter about the intraday head and shoulders that was forming on the 5-minute futures chart, which is reproduced below. Noticing patterns like this and trading them is one route to daytrading success.

Futures 5-minute chart August 20 2013

With the Fed meeting this week, Wednesday is likely to be fairly quiet until they say whatever they are going to say.

Cash on the Sidelines

Saw this chart on Stocktwits today. The information was being presented as a proxy for "cash on the sidelines." Household cash levels aren't an exact match for cash with no other purpose than to be thrown at equities, but let's assume for a moment that it is.


If you look at the chart and match the tops and bottoms with actual market peaks and valleys, it may have have some usefulness. If you accept the reasoning that relatively little cash "on the sidelines" implies overbought conditions, and that a lot of cash "on the sidelines" implies an oversold market, the chart allows you to draw some inferences.

Notice how the red line bottoms out in 1999-2000, then rebounds. That was the market top, so it makes sense that people were throwing cash at stocks then. They ran out of ammunition, got scared, and the market tanked big time.

The market hasn't approached those levels since. The "cash on the sidelines" again peaked around 2008-2009. This matches nicely with the market bottom during those two years.

So, what might this imply for our market? We can all draw our own conclusions. However, it suggests to me that the market is not wildly overbought by this measure, and in fact is fairly valued. If the "cash on the sidelines" were down around 1999 levels, it might be time to head for the bunkers. However, current levels are in the central zone, not much lower, in fact, than in the 1950s. That seems pretty normal.

It's not wise to try to read too much into charts like this, either. However, if this "cash on the sidelines" says anything at all, it gives a little support for those who think SPY isn't at some natural limit or anything in the 1600s, and in fact easily could run higher before truly becoming overbought. On the other hand, the chart also implies that the market also isn't wildly oversold as it was in the 1970s and early 1980s, either, but nobody thinks that in any event.

My own tactic is to forget the numbers at the front of the market averages - the "16" in SPY for instance - and just focus on the following numbers, the "50" and so forth. That gives a better read for short- and intermediate-term trading.