SPY August 7 2013

SPY daily chart August 7 2013

Wednesday, August 7 2013 saw a continuation of the pullback from the all-time highs set last week. SPY was weak early and relatively strong late, closing near the top of the day's range. The day's gains were particularly impressive given the sell-off of the Nikkei 225 last night, though that seemed more based on the unexpected strength in USD/JPY than anything going on in US markets.

Today, SPY quickly headed down to the bottom channel trendline that we've been following for months, and then abruptly reversed to the upside. That is initial confirmation that the old uptrend channel remains of use.

It was a tricky day to trade in some ways, but it followed the pullback pattern we have seen so often during this rally: weak early, strong late, with an abrupt low and reversal in the early/middle part of the day. There was never a hint of panic selling, and indicators like the VIX did not show undue uncertainty. Short-term traders were in control.

The day's trading formed a Morning Doji Star. This is a Bullish reversal pattern. It suggests that sellers exhausted themselves on the trip to the lows, and then Bulls reasserted control. We could get confirmation tomorrow if the market is reasonably strong. If the pattern is confirmed, the low is in for now and would be today's low at 1680.75 on the futures.

A couple of possible Bearish formations in development deserve mention simply because we must be ready for anything. One is that the several days we spent above 1700 may be the start of an Island Reversal Pattern. This would be Bearish. That pattern will be quickly eliminated, though, on any significant move higher from here.

Another possible pattern is a head and shoulder pattern, formed the same way, with the top of the head above 1700. Anything is possible, but it is unlikely that a six-month Bull Market is going to end on a three-day top, especially given the lack of any fear in the market today. However, if we are unable to get past the mid-1690s on the futures in any reasonable time frame, that pattern might come into play for real.

If you've been watching the markets closely this year, you'd likely agree that today's sell-off seemed like business as usual, a perfunctory rinse to clean out weak hands. It could develop into more selling, but during this rally, the flushes that saw a quick reversal like this have been met with more buying.

The key is a break above 1690 on the futures, which was the pre-market morning high. Resiliency above that most likely portends another test of the all-time highs above 1700.

The fears du jour were the usual ones about the Fed tapering. That is always a possibility, and who knows, the Fed may have cut back their buying already for all we know. It is interesting that the Fed Governors seem to be engaged in an organized attempt to beat down expectations of POMO (Permanent Open Market Operations). This may be due to their realization that the market would tank if word came out unexpectedly that the Fed is tapering or even ending QE, so they are giving these warnings to try to blunt or even sterilize the blow when it does happen.

A report after the close tomorrow will provide some insight on where the Fed is at right now, and its imminent release may freeze trading late in the day. However, the Mantra among some that is developing that the Fed is going to start tapering in September seems to be based on facts in only a very tenuous fashion. Please note, though, that September is traditionally the weakest month of the year for the market.