SPY July 19, 2013

SPY daily chart July 19, 2013

Bears were given the gift of the perfect storm on Thursday night: MSFT and GOOG both posted weak earnings, and an NFL city - Detroit - declared bankruptcy. It doesn't get much better for the dark side than that, not unless Ben Bernanke wakes up in the middle of the night after having a really bad dream and stubs his toe.

So, futures quickly dropped ten handles and then traded in a five-point range in the 1670s, with a lot of action at the lower end. Things looked even worse for Bulls when the Nikkei suddenly and inexplicably dropped 500 points in about ten minutes around midnight (that was probably positioning ahead of the Japanese election, and the Nikkei subsequently held the key support level of 14500).

Bears were busy patting themselves on the back and counting their profits in advance from the day ahead. The question wasn't whether the market would tank - it was only by how much. That, by the way, is a pretty reliable signal that things might not be quite as bad for the market as they might seem.

The market indeed opened lower, ominously declining into the cash open, but then refused to tank even further. Instead, the futures started creeping higher, with several extended pauses along the way. After Bear disbelief gradually gave way to frustration, and then resignation, they obligingly generated the usual final-hour short covering that propelled the futures back to the 1690s in the usual parabolic pattern that Bears know all too well.

We have seen this movie time and time again. In sum, something bad happens that, in days of yore, would have sent the market down at least 5% overnight. The Bears, stuck in the rational 1990s, accordingly react as if the normal market rules still apply - you know, that bad news, especially from market leaders like MSFT, means the market must go down.

It doesn't have to. Not in the age of Bernanke.

As I argued in yesterday's post, this is not an earnings/economic data-driven market. Bulls know that Fed Chairman Bernanke has their back, and that's pretty much the end of it. We can rant and rave all we want about what a joke that is - but it is the reality. It gives traders that necessary stiffening of the backbone that keeps minor pullbacks from turning into those cascading red candles we all remember from 2009.

Looking ahead, the tendency of this market, over and over, is that when an attempted move lower (due to bad news) is decisively rejected, a sharp move higher follows. In addition, the Japanese election takes place on Sunday. Futures could easily react to that on Sunday night. Look for a decisive Abe win if you are long, and hope for an Abe defeat if you are short. We remain Bullish and expect to see 1700 on the futures fairly soon (maybe next week).


On a personal note, someone helpfully pointed out to me today on Twitter (@The__Slayer) that I sounded "nervous." Well, all I can say about that is, you bet I was! If you ever read something posted by someone who acts as though they have it all figured out, that the market is a mere "bag of shells" as Ralph Kramden would say, and that they knew what was going to happen all along, my suggestion is - run the other way as fast as you can! I am a real trader with real positions, and I've even been known to throw things in reaction to market moves. Any trader who wasn't at least a bit uncertain about market direction in the last 24 hours was probably dead, and traders who pretend they don't feel a thing about the market might as well be. Just don't let fear/nervousness/panic/trepidation/ecstasy/joy/disbelief cloud your trading judgment and you'll be fine.

SPY July 18 2013

SPY Daily chart on July 18, 2013

It was a positive day for the market on Thursday July 18, as SPY broke through resistance and spent most of the day in the 1684-1687 (futures) area. SPY set a new all-time high, following in the footsteps of most of the other major averages.

Ben Bernanke gave his annual Humphrey-Hawkins testimony to Congress, but it was a non-event as far as the market was concerned. Early strength did erode during the afternoon, and after the bell some weak earnings from MSFT and GOOG, along with the announcement that the automotive town of Detroit, Michigan had filed for bankruptcy protection, sent futures lower.

At first glance, the negative after-hours new suggests a hard down day on Friday. That may well happen, as it would be the obvious result of bad news and perhaps some desire to take profits at a new high. We need to be prepared for anything, though.

Things to consider going into Friday:

First, this is a peculiar market that is not solely driven by earnings and economic data. You may laugh and say, well, all markets are driven by earnings and data. That is true to an extent, and was the case i the past, but maybe not so much now. GOOG and MSFT reported weakness, but neither is about to go out of business, and neither has quite the following of Apple. MSFT in particular hasn't been a real bellweather for years. Instead, this market is being driven by the Fed and QE. If you know that the market is likely to keep rising in general until QE ends, isn't buying a nice, fat dip a prudent course of action? We could see a surprising amount of buying enthusiasm tomorrow or perhaps on Monday as traders position themselves for a month or more from now. Any dip would be welcomed by traders shut out until now by constantly rising prices. Who is smarter, the one who sells, or the one who buys and holds through the pain until SPY recovers?

Second, the Detroit bankruptcy is not a surprise. That has been on the radar screens for years. The bankruptcy of Harrisburg, PA had no discernible effect on the market, and it's a pretty big town, too. The market moves in reaction to surprises, and there's little of that regarding Detroit.

Third, the SPY remains above its trend line. There is decent support in the 1670 region. An extended break below that would be Bearish and probably send the market tumbling.

Fourth, the 50-day moving average is at 1630. SPY is about 50 points above there, which is an extreme gap that usually doesn't last too long. That wide of a gap invariably closes, one way or another. Should the market make it that far down, it would provide a nice base of support. It could also close by time, though that would take a while.

Fifth, the market may just need an excuse for a breather. A moderate pullback here, now that the new highs are in place, would recharge the market's batteries for more gains. Further gains are likely at some point due to QE and general market momentum.

Sixth, a break below 1670 would snap the current uptrend channel. It is just as likely that buyers will be laying in wait to resume the uptrend. On the other hand, more sellers will appear if that level fails.

Seventh, Friday is options expiration day. Anything could happen.

We'll see what develops, but any correction is unlikely to last more than a few days, and maybe not even that long. Will be staying prepared for any buying surges that seem to pop out of nowhere. My point is, just because futures drop doesn't mean the end of the world. We easily could see surprising strength on Friday, especially as the day goes on, that would confound just about everybody.

SPY July 17 2013

SPY daily chart on July 17 2013

Today, Wednesday, July 17, was another Ben Bernanke event day, and it went pretty well, all things considered. His testimony was greeted warmly by the market, as his comments were considered "doveish." One surmises that Ben has changed his mind about the importance of the market since his callous and heedless comments in May caused a near-crash. He suddenly is being a little more circumspect, mindful of the enormity of every twitch of his beard at these public events. The other Fed Governors are keeping their big mouths shut a little more, too.

Apparently, the Fed no longer wants to corner the market just on mortgage-backed securities, for it is now buying treasuries outright. It's kind of an odd change, since the Fed basically is simply buying with one hand what the Fed is selling with the other, but somehow it works in the new world of finance. As usual, the long-term implications are murky at best, but nobody is too worried about the long term in this market. We mentioned a few weeks ago that the sudden rise in mortgage rates was probably due to something the Fed was doing differently, and this is probably that very thing. The Fed isn't always as forthcoming at the time it does things as Bernanke likes to pretend.

The SPY continued what I am now calling a "stealth rally." That is, it is moving higher without seeming to at all. Rather than the big overnight surges we have seen recently and that also were the case a couple of years ago, now we are seeing tepid overnight sessions and fairly tepid day sessions as well. At some point during these day sessions, though, the SPY almost accidentally or mistakenly moves up to new highs, then promptly pulls back as if to say, "Oops, sorry, didn't mean to do that." The E-mini futures actually established a new all-time high by a tick at 1680.50, but nobody seemed to notice, which was bizarre, but hardly the most bizarre thing about this market. Normally, these thin "topping tails" would suggest a reversal area - but we cannot say enough times that this is not a normal market.

Most of today's volume - in fact, almost all of it - was between 1675-1678. That is higher than any previous day in, I am pretty sure, all of market history. The balance of value thus shifted higher, even though the day looked from the price chart as if it were simply a sideways move. A head-fake to the mid-1660s overnight was not repeated during the day session.

Looked at a certain way, maybe with your head turned sideways and squinting, the last few days might be interpreted as forming a bit of a dome pattern. Much more likely, though, is that it is another of the seemingly endless series of Bull Flags.

There are a dozen reasons why this market should crack and fall straightaway to the 1500s, but the problem is that it shows no signs of doing that. We remain, against all our better judgment based on twenty years of trading experience, convinced that the market will continue moving higher from here, probably to the 1700 vicinity, before we see a real pull-back. We also expect an eventual correction (maybe next year, who knows) that will scare the pants off just about everyone, but not right now. Going up just is what this market does, and we are in no mood to fight it, especially with Bernanke now suddenly committed to supporting it.

SPY July 15 2013

SPY July 15 2013

The market continued its digestion of the gains of 7/11 (how very appropriate) on Monday, July 15. It was quiet, with a gentle move higher that petered out in mid-afternoon. After that, the market remained within a few points of the day's high without ever seriously threatening extending it higher. The Nikkei (closed Monday for a holiday) has recovered about 2/3 of its losses as well, which is healthy for global markets.

We have something on the order of ten green candles in a row. The market hasn't gone back and remained within a previous day's trading range ("inside day") in almost two weeks, much less had a down day. In a normal market, you would almost never, ever see this kind of extension. Up 11 straight day. The statistical chance of that happening is miniscule - but it is happening. It used to be that traders would start sounding the alert after three up days. Statistically improbable events happen all the time, the hard thing is knowing in advance which they will be. What is happening is statistically improbable.

What does that tell us? Not too much, aside from the fact that this is not a normal market. However, the growing probability is that, when a real pullback (meaning, more than the usual 3-5 point pullbacks we've been seeing) does occur, it has a lot of ground to cover. The last area of real congestion/support/digestion was in the 1610-20 region. That's a long way down. A touch of that area again shouldn't be ruled out by any means, but something down to the 1630s would probably scare enough people.

Nevertheless, the market reality is that it is going up. There must be behind-the-scenes forces that some smart-ass journalist in Rolling Stone or somewhere like that will someday reveal with slick prose as "the reason" for the big surge, but it really doesn't matter: the market is on automatic and going up. To the downside, a break below 1660 in the futures would be trouble, but then, any drop would probably scare a lot of people. The market is like a military offense which is petering out, but the Generals are deathly afraid of halting it because they know that once they do, the enemy will take the initiative.

Watching for a desperate lunge toward new all-time highs and 1700, with a likely failure somewhere between here and 1700ish and then a sharp correction.