SPY June 12 2013

SPY June 12 2013

Market is fumbling around down at the lower end of its recent range again, right at the 50-day moving average, after a determined sell-off. As we have been saying, breaking 1620 almost certainly means a re-test of 1600, and what happens at 1600 is highly uncertain. Could be a double bottom, in which case we get a huge bounce again, or support there could break and we head toward major support at 1540. Among the likely secondary possibilities is a move down to the mid-1590s, and then, just when everyone is convinced that support is broken for good and we are headed to oblivion, we get another mega-bounce. We can't stay in this 1600-1640 range forever. It's interesting that the futures can cover almost the entire recent range in one day, indicating a compressed market with a major decision on direction near.

Highly risk averse traders are going to avoid this market for a few days, until there is a clear decision on direction, or at most play it for scalps with tight stops. Word from the trading pits today was that even the pros were trading lightly and without a clear consensus on direction late in the day after today's uninterrupted run lower started to peter out. They just trade short-term, though, so you can't read much more into that.

What appears clear is that repeated failures in the mid-1600s suggests that longs are starting to question the durability of this uptrend, especially in light of the onset of the typically volatile summer season. If that feeling grows, the exit door is going to look smaller and smaller. Fund managers have big profits to protect. The flip side is that the repeated failure of the futures to return to the 1500s must make the prospect of taking any chance to cover there look more and more inviting.

The growing evidence of the downtrend channel drawn in the chart simply confirms what we've known for a while, that the market is consolidating after the May highs. Could be a Bull Flag, or it could be part of a larger topping process which has been in the works now for weeks.

The sharp move lower today does suggest continued weakness. The edge lies with the Bears for now. Moves higher are shorting opportunities until we break out of the downtrend channel.