TheSlayer's Market Thoughts

SPY May 31 2013

Market technicals looked weak all day, made a feeble attempt at a run higher, then completely tanked in the final hour. Congratulations to those who were short or flat. With the iffy moves recently, it was smart to just step aside if you didn't want to go short.

This is the time when everyone feels they finally have the market figured out. "The top is in, it's down from here." If you only started trading this year, the markets suddenly must seem wacky, with people not immediately buying the dip. Interestingly, late in the day there was such an attempt to buy the dip around 1640, but it failed miserably.

One must look at price action objectively. Big, red candles are scary, and everyone has been waiting for "the big one" for weeks and months.

The danger is to latch on to what looks like the realization of these sorts of expectations and assume we know what must come next. That is when you get into trouble.

Looking objectively at the market action, we start by realizing that the US markets, splendid as they are, do not exist in global isolation. If Japan is tanking and Europe is meandering, the US markets are going to be unlikely to sustain a massive rally. Things simply don't work that way. If Japanese investors see opportunity in a lower Nikkei 225, they will pull money from the US and invest it there. That's just a minor example of how international money flows will undermine the US markets, and why the SPY does not exist in isolation.

So, to understand where the US markets are headed, it helps to take a look at the Japanese markets. They are down - are they going to tank completely? Most people think not, but nobody knows. The likeliest outcome posited seems to be that the Japanese markets are suffering a bout of profit-taking and will bounce back later this year. It's highly unlikely that it is 1989 again in Japan because the government there is determined to play the Bernanke quantitative easing game. If throwing money at the problem doesn't work, they'll just throw more. The Nikkei is likely to bounce back, but it may take time, at which point it probably will roar higher due to the recovery of investor confidence. Until then, everybody holding long there will suffer.

Turning back to the US markets, fear entered the market during the final hour on Friday. There now have been two weak closes in the weekly averages in a row. We are right back where we were in the middle of May.

SPY Weekly May 31 2013

 
The weekly SPY chart looks a bit like the weekly Nikkei 225, with allowances for the scale and the values.

Nikkei 225 Weekly May 31 2013

The take-away lesson is simply that the Nikkei matters, like the canary in the coal mine.

So, with the Nikkei leading the way lower so far, where might the SPY be headed? The SPY weekly shows that there is the equivalent of an air pocket from 1600 to 1620. Below that, a lot of value built up in the 1580s, with firmer support below that region around 1535.

So, we are headed straight for 1535? Not so fast. The averages already have fallen to a point of support. The 30-day moving average is right below us, and the 50-day moving average down around the bottom of the channel at 1600. The moves over the past month have been quick, jack-rabbit moves higher, and those need to consolidate.

If the selling continues - a big if in this market - a decline to the 1600 region is rising in probability. While that might just be a first leg down, anything below that must break through heavier support levels.

Key levels right now are, to the upside, 1635 (support becomes resistance), 1652, and 1657. To the downside, 1620 is where the big rise through 1600 first found a home. Below that, 1600 (actually a few points below, it's unlikely to stop right on that round number, 1597 was the old resistance level) is the most important level to watch. After that, the 1580 level was a support level.

Looking way down, the 200-day moving average is a little below 1500.

Last summer around this time, the SPY fell about 100 points, then quickly bounced back. People have memories, that easily could happen again. Quantitative Easing or not, markets go down as well as up.

But, first things first. Let's see what the Nikkei does and where we open on Monday, that will either confirm the worst fears and greatest hopes of the Bears, or confuse everybody.

SPY daily chart for May 29 2013

The market is continuing its move sideways, giving support to both the Bull and Bear cause. The trading range is narrowing, as we did not drop all the way to the bottom edge of the channel at 1635, stopping at 1638 as buyers stepped in a little early and ruined the usual script. Previously, sellers had stepped in at the low 1670s and prevented a run to the extremes in the higher direction. What this suggests is a temporary balance in forces between Bulls and Bears, with everyone aware of the parameters and nobody on either side worried enough about direction to take drastic action in terms of closing positions..

This has happened before on this uptrend, so there's no reason to read much into that. The market is correcting sideways, as it has done before this year and, no doubt, will do again. You may think of it as a Bull Flag, if you wish, or a coil. Whatever it is, it will resolve, and it probably won't take all that long to do it. Perhaps some time next week.

We already are back in the main uptrend channel that the average blew above last week, so there's no telling when we will break this sideways trend and either continue the advance or have the usual summer softness. The underlying factors of QE stimulus remain in place, at least for the time being, and the economy is improving, both significant pluses for the market.

SPY May 28 2013

The market has carved out a channel sideways. That's helpful for trading, because it helps us to form order out of chaos. The range 1635-1670 is in play, and could be for some time. Eventually, we break out, most likely in June.

Below, a follow-up to my 4-hour chart of the futures. Two things I wish to point out about this chart: 1) the futures did cross the 20-period line as predicted on Friday, and that crossover was a prime buy point; 2) The Fibonacci lines that I left up from the Bernanke spike last week had great utility in understanding subsequent market moves.

The great thing about this market is that, despite its relentless upward bias, its wild swings give great hope to Bull and Bear alike. Dropping from 1670 to 1654 intraday today just seemed to confirm every Bear's inner certainty that this market, like Hitler's view of the USSR in 1941, was a creaky old shack just waiting to have its door kicked in so it would collapse to the ground. It's easy to believe that sort of thing - if you willingly assume away the fact that the futures rose relentlessly from 1635 to 1670 in the first place. That's the kind of thing you have to ignore when you attack Russia - I mean, when you blindly short this market.

S&P Futures May 28 2013 Four-hour chart