SPY June 14 2013

Today's Market Action

June 13, 2013 was a disappointing end of the week for Bulls.

SPY June 14 2013

Many no doubt felt that the Thursday June 13 2013 rebound would extend into today's session. We didn't think that at all, it didn't, and the E-Mini futures never seriously approached 1640 during today's session. The one determined push higher during the morning chaos stalled out at 1635 on the futures and quickly reversed. The market internals just weren't there for a sustained push higher. Anybody who bought into that Bull Trap lost money. The rest of the day was spent in a choppy mess with a decidedly downward bias. The futures closed toward the lows and dropped a little bit more after the close.

Technical Factors

The downward trend that we had such difficulty seeing at first is now pretty clear. The downward trend channel seems to fit what has been happening recently. If the market were still in Bullish mode, that would be extremely unlikely: the channel easily would be breached to the upside, and the market advance would resume.

After all the to-and-froing since the breakout over 1600 in early May, we finally may be reaching a turning point in this market. SPY is getting squeezed because it is respecting the recent intermediate-term downtrend channel but also the long-term uptrend channel. There simply is not a lot of room left - one has to give. The 50-day moving average, which has been SPY's bedrock level of support over the course of this rally, also is rising fast and no longer gives the market much wriggle room. A fall to 1600 now would be significantly below the 50-day MA, breaching that key support.

So, either SPY breaks higher, or it loses contact with its main reference points of the current long-term uptrend. Flip a coin to decide, but the recent action in the market suggests more volatility is in store. Judging from today's action alone, the failure to push past 1640, the aimless chop throughout the day and the close toward the lows suggest a weak market.

Today's false breakout higher was like a trip down memory lane because it resembled the actions of a normal "two-way" market. That's why so many of us are frustrated by this market - we expect those breakdowns and automatically fear them, but instead, for the past few months, those runs higher mysteriously have continued all day. Well, this one didn't, and that is the most ominous portent of all for the Bulls. The last thing they want is a return to the normal rules of the market, because that spells trouble for endless rallies.

What is Going On Behind the Scenes?

One recent fundamental factor has caught our eye. It may mean nothing, but it also may be a clue as to why the market finally is softening. The upward rise in mortgage rates recently suggests something has changed in that market. With all the meddling that Bernanke has had the Fed doing in that area, the suspicion arises that the Fed may not be pumping quite as much money into the markets as it had been, or perhaps it has changed its focus. That is a tricky technical issue that someone with clearer insight into that area might shrug off and say, "Bah, that has nothing to do with anything." Perhaps. But when something fundamental like that changes, it is of interest.

Would the Fed taper without telling us? Why, that would be - just like the secretive Fed. And it also would be in complete accordance with what Chairman Bernanke has been saying all along, that the Fed will adjust the size of its QE as it deems conditions warrant without having to notify anyone (meaning, it arbitrarily and capriciously will determine when the equities markets shall rise and fall). The unemployment rate has fallen over the course of the past year, though not to the target of 6.5%, and that may be justification enough in the Fed's eyes for a little easing on the QE gas pedal.

USD/JPY and the US Markets

Another factor is very curious and troubling.

USD/JPY compared with SPX, June 13 2013

Sometimes, relationships between different financial instruments develop, and then. just as mysteriously, they no longer correlate. There was a time a couple of years ago, for example, when the relationship between the Euro and the Dollar (EUR/USD) was all-important. That ended when the European financial crisis cooled off. The pros are always looking for these relationships as market tells, and they don't care what the underlying factors are. There are reasons for tight correlations, make no mistake about that, but those reasons simply don't matter when you are trading off of them.

The above chart compares SPX (proxy for the S&P 500) and USD/JPY (the dollar/yen ratio). Note how closely the two have been correlated during this year's rally. The current uptrend began in November 2012, right when the tight USD/JPY correlation began. The Yen suddenly took off on its own in late May, though, which, if the correlation had remained intact, should have led to a decline in the SPY about as precipitous as what has occurred in the Nikkei 225. While that didn't happen, it was when the US markets suddenly lost their upward mojo.

Over the past week or so, as the Yen skyrocketed versus the dollar, the S&P 500 has refused to be pulled lower in conjunction with the USD/JPY. It also is true that SPY hasn't been as strong as it was before then, either. Note that this collapse of the dollar also ties in nicely with the recent decline in the Nikkei. Why is the SPY special, that it can track the USD/JPY so closely for so long, and then just shed it like a bad habit when the relationship is no longer Bullish? Who knows. SPY may just be taking its time in following the USD/JPY lower, or SPY simply may have stopped tracking the USD/JPY for unknown reasons.

Not all is terrible if the USD/JPY correlation with the SPY resumes, despite the recent plunge in the USD/JPY. Many think the Yen is overbought (due to technical factors) and due to weaken again. There has been the curious spectacle this week of a flood of predictions from the likes of Goldman Sachs about how the Nikkei 225 will see 17000 by year's end, a rise of about a third from current levels.

Why are we suddenly seeing all these (renewed) rosy predictions for the Nikkei 225? Here's my theory. The Japanese markets have risen when the Yen fell, because that helps their export industries (it also hurts them due to higher cost of imports, but the overall effect is likely positive for Japanese exporters). If the brokers are right, or anywhere near right, about the Nikkei going through the roof, that implies that the Yen will crash. Look again at that chart above - if the Yen crashes, the USD/JPY goes up, and SPY will resume its advance. Despite the possibility of a looming downturn in SPY if SPY continues mirroring the USD/JPY, Bulls may be quite happy if that relationship remains intact through the end of 2013.

Conclusion

We retain our Bearish stance (leaning short) until and unless SPY makes a strong and sustained move above 1640. A close below 1600 spells real trouble for this market - and that is only about 20 points below us. Naturally, we closed today almost precisely in the middle between those two key levels.

SPY June 13 2013

SPY June 13 2013

SPY made the expected re-test of 1600 on June 13 2013. It bounced cleanly and wound up in the 1630s. On the surface, this was a satisfactory outcome for Bulls.

However, several things were extremely troubling about today's action. First, futures dipped lower during the overnight Globex session than during the last test of 1600. They also wound up lower afterwards, unable this time to even break 1640.

These may sound like minor quibbles. Perhaps they are. The market reacted well to the good claims data in the morning, though the bounce was only partly attributable to that and was more technical in nature.

At the close, SPY hit the top of the channel we drew on the daily chart the other day and stopped cold. That's why we draw them. Odds are good that this hit of the descending channel top is as high as we get this go-round. I will note parenthetically that this market is respecting the channels, the major moving averages such as the 50-day MA, and the "bright-line" support levels such as 1600, but little else. You can forget about relying on Candlestick patterns and stuff like that.

If we're not going up, we're eventually going down. An average can only hit a key support level so many times such as 1600 before it shatters, and the "expected" bounce never materializes. At that point, it will be the Bulls who will be panicking instead of the Bears as in the past couple of tests. The Bears may not be panicking as much and growing more confident, which may account for the lessened bounce. We could see SPY 1540 in a hurry if 1600 breaks, as that means the major uptrend channel will be violated as well as the 50-day moving average and the magical 1600 level. There's nothing magical about 1540, either, but there's a lot of congestion there that should provide at least a temporary safety net.

The Nikkei 225 cannot keep tanking with the SPY just acting like it doesn't matter. It does matter, and the Nikkei will drag the US markets down with it unless the Japanese get their act together over there.

I said back in early May that the likeliest time for a pullback was early to mid-June. Perhaps it is coming about a bit later than I thought, but it sure looks close now. It is important to be judicious and time it right, but, except for those trend-up sessions such as today's that always make everything look so nice and comfortable for Bulls again, shorting the pops increasingly looks like the strategy with the highest favorable odds. In other words, it is time to lean short.

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.

SPY June 11 2013

SPY June 11 2013

There are times when it is dangerous to try and out-think the market. If you control hundreds of millions of dollars and can actually affect the market, that's one thing. If, however, you are just a small fish who is carried by the tide, it is best to wait until those with the deep pockets tip their hands.

The current long-term uptrend is innocent until proven guilty. Anyone actually playing for a reversal may get lucky, but that is not a prudent way to play the odds. We remain in the middle of the Sainted uptrend channel that began last year. Lord knows what happens when that gets breached forcefully to the downside. But it hasn't happened, and probably won't for a while, so long as QE remains in place.

So, we are stuck in a range. It can be defined as 1600-1685, but realistically it is much smaller than that. Any extended break below 1620 at this point almost certainly means another trip to 1600, which probably won't hold a second time (if it does, hold on to your hat for the rocket ride back up to 1640). Even shorts are getting wise to this game, and they aren't actually philanthropists who want to finance repeated rinses and surges for the benefit of longs.

On the other hand, any break above 1650 would be telling. It might not lead immediately to new highs, but it would be a pretty good indication that such new highs await.

Trying to read anything of deep significance into the vicious intraday swings we've seen recently is futile and counterproductive. The market goes down ten points and the Bears think they've finally been proven right, the market goes up ten points and Bulls start loading up. Both wind up getting creamed. In a sideways market, you buy the dips and sell the rips, that's just how the experienced players do it until it no longer works. Also, if you really want to blow your trading account, try to play every little swing up and down. It will work a few times, then suddenly it won't ("Hey, it hasn't been doing that!) and you will get whip-sawed just like they want.

Daytrades and scalps for this trader for the time being, until the big fish tip their hands with a break in one of those directions. Expect a major head-fake, just when one side thinks it's been proven right, the boom will fall in the other direction and really take off without looking back.

All that said, with all the volatility we're seeing, daytrading actually is a great way to make coin right now if you recognize the chart patterns and exercise discipline. You'll likely see your price at some point sooner rather than later with all the contrary swings. That is why some of us actually prefer static markets over trending ones. But with this market, best to play in the direction you think the market will wind up going ultimately. Playing both sides is cool and all everyone says you "have to be able to do that to be successful," but it also will tend to mess you up in a see-saw market. Wait for good set-ups in your direction, they happen every day if you are patient.

SPY June 10, 2013

SPY June 10 2013

June 10 2013 was a choppy, consolidation day. The only difference between this choppy day and similar such days last month was that the S&P 500 ended slightly down rather than slightly up, but you have to expect something like that after an uninterrupted 40-point run.

The average closed dead center in  the middle of the channel - and that's not an exaggeration. Below I have posted two Futures charts with Fibonacci Retracements from the all-time high to the recent low just below 1600. Note that today we came to rest right on the 50% retracement line. Those Robots sure know their figures!

S&P 500 E-mini Futures June 10 2013

Incidentally, some folks are talking about the SPY being in some kind of grand downtrend from the all-time high. I don't see it. We may be in a long-term downtrend - but the evidence really isn't there yet. I drew the downtrend line on the chart, but it just doesn't look meaningful to me, and I have a very open mind, believe it or not.

Below is a close-up of the Futures, with the same 50% line shown, on the 5 minute chart. The S&P 500 literally closed within a point of it. Isn't that something? What it tells me is that the next move is critical - a move down and we just saw an oversold bounce. A move up and we continue the grand uptrend. Either way, the long-term uptrend remains intact unless we breach 1600 and keep on going.

Close-up of S&P 500 E-mini Futures June 10 2013

No reason to risk anything major until the market gives us some guidance, maybe tomorrow, or maybe later if the choppiness continues. That the Nikkei 225 is showing the first signs of stabilizing after its recent crash is a good sign for the entire world of equities.