SPY June 20 2013

SPY June 20 2013

Fed Chairman Bernanke spoke, and the markets trembled. A sell-off that began overnight gained force during the morning after weak Initial Claims. The selling ripped lower steadily throughout the day, leaving SPY slightly above its lows of the session at the close after some late short covering.

It was an old-fashioned sell-off, the first of 2013. In some ways, it was the mirror image of the rips higher that the market has seen recently, providing few good entry spots for initiating shorts as price hugged the lows throughout the day. The pace of selling appeared to accelerate as the day progressed, with the sole exception of the last twenty minutes or so.

The likeliest destination, as we have saying steadily now for some time, is the high value node in the 1540s-1550s. That is where SPY spent the most time on its ways up, and that sort of congestion is what technicians look for in terms of support. Another day like today, and we're there - but we're not predicting that, if we do get there, it might take some time.

With all the technical breakdowns, there are many fund managers and other institutional investors with portfolios loaded with equities that are rapidly losing value. It's not a question of pride with these guys, but of saving their jobs. They have to preserve as many gains as possible, else they will look like fools to their clients. Combine that with the fears of the average investor, margin calls (there has been record margin in the market recently) and the lack of any sign of buying pressure today, and you have a recipe for continued selling or, perhaps, a fairly tepid day.

On the other side of that scale is the natural desire of shorts to lock in profits and bargain hunters, but both could be biding their time. Our best guess is that selling will resume tomorrow, at the very least at the open. Heading into the weekend long after all this selling can't be an appetizing prospect for most traders. Obviously, the market could surprise us, so futures action overnight will be watched closely.

UPDATE 1 A.M. EST: Have been watching the futures like a hawk, and went long them. Nikkei 225 went green after initial sell-off, and Future are ramping higher. Tomorrow is starting to look Bullish.

SPY June 19 2013

SPY June 19 2013

The market was setting up pretty nicely for a resumption of the uptrend. The Fed announcement was exactly as what would be expected, nothing new, no wording about ending Quantitative Easing.

Then Ben Bernanke stepped before the cameras for his news conference, a relatively new invention of the past few years for a Fed Chairman. The markets were calm for a Fed announcement, and roughly where they were before the announcement.

Looking nervous and speaking in his familiar staccato delivery, the Fed Chairman said that he expected the Fed to begin tapering by the end of the year and for QE to end by the middle of next year.

That was all the market had to hear. It started heading lower and didn't look back. At day's end, it came to rest around the usual support level of 1620. The bond market saw interest rates shoot higher.

It's not really fair to blame Bernanke. QE has to end at some point, and they might as well be open about it. They've been dropping hints for weeks. This was the first clear word on the matter, though.

Having stopped around the 30-day moving average in its fall, we fully expect SPY to make another test of the 1600 level in coming days, perhaps tomorrow. If that holds yet again - a very, very big "if" - we expect a fairly dull summer spent in the 1600s. The next most likely scenario is a technical bounce back to the 1630s.

As a trading tip, trying to trade the type of volatility we saw today was a sheer gamble. If you did so and made money, terrific, but it requires more luck than usual. A wise move was simply to avoid the whole thing.

SPY June 18 2013

SPY June 18 2013

An unexpected rally developed today in SPY, despite weak market internals. It wasn't a vigorous move higher, but it did take out the key resistance at 1640 and closed well above that number. The downtrend channel from the all-time high now is history. That signifies a resumption of market health and a likelihood of further drives higher, perhaps after some hesitation due to reports from the Fed meeting being held this week.

Chairman Bernanke speaks on Wednesday, with all the expected related announcements from the Fed about how the Fed isn't changing a thing about QE and so forth. We got the bounce we looking for heading into his speech, now a period of hesitation as the market worries about what he says could be in the cards. Like everyone else, we will wait until after the dust settles before drawing any further long-term conclusions about where this market is headed, but if Bernanke says the right things, we should be headed higher. This situation is ripe, however, for short-term volatility in both directions.

SPY June 17 2013

SPY June 17, 2013 Daily Chart

The market picked up strength overnight and opened well above the Friday close. It then ran higher, but stalled then below 1640 (futures) after briefly piercing it. A late afternoon article, apparently from the Financial Times, didn't say anything new, but sparked jitters about what Fed Chairman Bernanke might say at the conclusion of the Fed meeting on Wednesday. This sparked a furious sell-off of over 10 points, roughly half of which was recovered by the close.

The long-legged Doji that summarizes the day's action masks the intraday volatility.

E-mini futures June 17, 2013 5-minute chart

It was an indecisive day all around, which you would expect right before a Fed meeting. A lot of traders will wait until later in the week to trade, after Bernanke says whatever he has to say, which invariably will be what he has been saying all along. If he spoons out enough soothing platitudes (unlike last time), the market could surge higher, at least temporarily.

The causes of today's strength were related to optimism about what Bernanke will say, and also strength in the Nikkei 225 that corresponded with some weakness in the Yen. The tempo of the day's advance, though, was weaker than the usual furious rallies we've grown accustomed to this year. It stalled out around 1638 before the big late-day sell-off.

The late buying was probably part technical bounce and part anticipation of the "Tuesday effect" that has sent the market higher on almost all Tuesdays this year. Reading too much into it is probably a mistake.

The SPY did break out of its downtrend channel, though it did so enigmatically in the form of an indecisive long-legged Doji. SPY was running out of room to prevaricate much longer, so we don't read too much into that, either. That it did stay in the middle of the long-term uptrend channel is of much greater importance.

Since we did not get a close above 1640, we retain a Bearish edge, but it has shifted more toward neutral. A short-term but muted rally before Bernanke would not be a surprise at all, especially if the Nikkei continues its strength, but weakness is likely as his announcement nears. So, overall, we are not looking for dramatic change over the next couple of days. As for the Bernanke effect, it depends on how the market reacts to what he says, which is impossible to predict.

What Would Turn Me Bullish Again

E-mini Futures Sunday Night June 16 2013

As I've been posting, I believe that we have seen more weakness than strength recently. Obviously, the averages have pulled back, but it is more than that - it is the increased volatility, the tepid bounces, the failure to hold key support levels aside from the all-important 1600.

Futures are up about 6 points right now, along with the Nikkei 225, so the temptation is to say that all that unpleasant selling is behind us. Perhaps, but I doubt it.

That said, I'm perfectly happy to change my assessment to Bullish at any time, because the market spends most of its time going up, not down. It simply is more profitable over time to be long the averages than short them. I fully expect the market to weaken as Bernanke's performance approaches, then have some kind of wicked move thereafter.

In the chart above, I have drawn a simple trendlne from the all-time high at 1685 downward. Note that we have hit it several times, but not breached it, at least for very long. A decisive move above that would turn me Bullish. We haven't it yet. It wouldn't take much, as it currently sits around 1633 - but the proof is in the pudding.

After that, we need continuation above 1640, with a close above that level. That is unlikely with all the Fed action due this week, but the market can do crazy things.

To the downside, yes, there is a bottom channel line, but all that really matters right now is the 1600-ish level.