SPY August 22 2013

SPY Daily chart August 22 2013

Thursday August 22 2013 was a wild day, with a huge bounce off of oversold conditions overnight that continued into the morning. After that, the market drifted higher throughout the afternoon, closing not far off the highs for the day. The Nasdaq was down for much of the afternoon with computer problems, but when it opened, it shot higher.

Some quick points:

First, we were talking about the importance of the 100-day moving average. Everybody out there is watching these major levels, so that is why we do. It can really make all the difference in your trading to keep track of these levels and play them. Of course, to play this bounce, you had to be watching and trading futures after hours last night; wait 'til this morning and you miss the party. General rule of thumb: first time you hit support (or resistance), it works. Second time, not so much, with lesser effect with each test.

Second, we scored a perfect touch and go on the 50% Fib level shown below. If you have key support such as the 50% Fib level and the 100-day moving average in roughly the same spot - that's good support.

Third: we closed the day right at the key resistance level that we've bumped up against several times this week, and that quickly sent the market reeling lower. Since this is the third or fourth test of the 1656 level of the futures, we need to watch it carefully for a break higher. You can call this the 50-day moving average resistance if you wish, too, it's in the vicinity.

Fourth: if we do crack higher through resistance, there is an air pocket above us. If the Bulls really get rolling, the futures could see 1680 before you know it. That's not a prediction, just an assessment of the lack of resistance above 1660.

Fifth: there was a huge amount of buying at the Closing Bell. That suggests that retail is hopping back on board after being scared earlier this week. Make of that what you will, retail has been right a lot this year.

That this market is confounding all sorts of knowledgeable people is beyond question. When insiders sell in droves, and the market bounces back - that's strength, baby. We are maintaining our quasi-Bullish stance simply because this market just takes a lickin' and keeps on tickin'. It should go down and it must go down - but it doesn't. We must play reality, not our hopes and feelings.

Don't assume that because you saw some knowledgeable pundit being all Bearish (or Bullish) for days or weeks, that they are going to remain that way under the circumstances we saw overnight. They'll change sides faster than you can say "Tom Sosnoff." You'll find out later that they switched sides when they're smiling and you're not. They are under no obligation to maintain a "foolish consistency," as Emerson would say. Keep the key support and resistance levels on your charts and respect them, everyone else does.

Below are a couple of charts to illustrate the points made above. I've had those fib levels on my charts for days, I think since some time last week. Notice how perfectly they worked.

Futures 4-hour chart August 22 2013

Futures daily chart August 22, 2013

SPY August 20, 2013

SPY daily chart August 20 2013

On Tuesday August 20, 2013, the market started off strong, reaching a peak at 1:00 EST. After that, it pulled back a bit, chopped sideways, then broke lower in the final half hour.

The day was all about key support and resistance levels. After finding support at the 38.2% Fib level, SPY moved higher until it ran into the 50-day moving average around 1656 - which also happened to be a congestion zone. After being rebuffed there once, the Bulls gathered their forces and snuck above that level, but the surge didn't last long at all. After that, volume declined until final there were no buyers left and futures fell 5 points.

There's a danger in reading too much into intraday movements as a read on the broader direction. SPY failed at a key resistance level, and then some news come at late in the day that encouraged sellers. That often happens when the "common wisdom" is that the market should go one way or the other - news that helps the market close in that direction just happens to appear late in the day. Go figure.

Looking at things a bit more broadly, however, Bulls should be encouraged by the day's trading. It was a weak bounce, and a weak-looking candle, for sure; but that is how several big rebounds have started. The initial bounces on February 26, April 19, June 25 and several other turnaround days this year weren't very impressive, either. They all ushered in strong moves higher in the days that followed. On the Bearish side, there was the late-day weakness which has become fairly common recently to give encouragement, and the fact that overall it was a fairly tepid bounce off of oversold conditions and on declining volume throughout the day until the final sell-off.

Which is not to imply that the market is going to surge to 1800 any time soon. It is simply meant as a kindly suggestion that nobody should get complacent about where this market is heading, because it is giving conflicting signals all around. Very slight edge to the Bulls after today.

Some of us were posting during the day on Twitter about the intraday head and shoulders that was forming on the 5-minute futures chart, which is reproduced below. Noticing patterns like this and trading them is one route to daytrading success.

Futures 5-minute chart August 20 2013

With the Fed meeting this week, Wednesday is likely to be fairly quiet until they say whatever they are going to say.

Cash on the Sidelines

Saw this chart on Stocktwits today. The information was being presented as a proxy for "cash on the sidelines." Household cash levels aren't an exact match for cash with no other purpose than to be thrown at equities, but let's assume for a moment that it is.

If you look at the chart and match the tops and bottoms with actual market peaks and valleys, it may have have some usefulness. If you accept the reasoning that relatively little cash "on the sidelines" implies overbought conditions, and that a lot of cash "on the sidelines" implies an oversold market, the chart allows you to draw some inferences.

Notice how the red line bottoms out in 1999-2000, then rebounds. That was the market top, so it makes sense that people were throwing cash at stocks then. They ran out of ammunition, got scared, and the market tanked big time.

The market hasn't approached those levels since. The "cash on the sidelines" again peaked around 2008-2009. This matches nicely with the market bottom during those two years.

So, what might this imply for our market? We can all draw our own conclusions. However, it suggests to me that the market is not wildly overbought by this measure, and in fact is fairly valued. If the "cash on the sidelines" were down around 1999 levels, it might be time to head for the bunkers. However, current levels are in the central zone, not much lower, in fact, than in the 1950s. That seems pretty normal.

It's not wise to try to read too much into charts like this, either. However, if this "cash on the sidelines" says anything at all, it gives a little support for those who think SPY isn't at some natural limit or anything in the 1600s, and in fact easily could run higher before truly becoming overbought. On the other hand, the chart also implies that the market also isn't wildly oversold as it was in the 1970s and early 1980s, either, but nobody thinks that in any event.

My own tactic is to forget the numbers at the front of the market averages - the "16" in SPY for instance - and just focus on the following numbers, the "50" and so forth. That gives a better read for short- and intermediate-term trading.

SPY August 18, 2013

SPY daily chart through August 16, 2013

As I write this, it is the weekend, and traders who follow equities online know one thing: that's when fear and pessimism run wild. If you are a Bear, and you want to feel better about your positions, the weekend is the time to check in at online forums. Just gabble something about Egypt, the debt ceiling or use the word "tapering" and you are good to go.

Bears are some of the best traders in the business. They usually get paid, they just have longer to wait for their earnings than Bulls, and their proceeds come in big, sloppy buckets of honey all at once. Permabears are their own breed altogether and, no matter how low the market goes, they say it will inevitably go lower. They're sometimes right.

SPY is at the 50-day moving average. Either that holds, or we will see the 100-day moving average about 20 points lower. Wherever SPY does hold, the odds of a bounce increase the lower we go. Having held 1650 on Friday August 16, a bounce off that level remains possible. The late-day weakness, however, was a Bearish indication.

Fundamental data is something chartists usually avoid. It clouds the purity of the charts, which are assumed to incorporate all factors. Of note, though, is Barron's reporting net insider sales of over $500 billion dollars in the first two weeks of August. That is a lot of selling - to put it in perspective, half a billion dollars is about six-months worth of the Fed's current QE program. What this tells us is that a) the people who have the best insight on what they are buying and selling are, in fact, selling, and b) eventually they will be buying back in. The thing about their buying back in, though, is that it usually doesn't occur until things get really cheap. Oh, and c), even the Fed isn't big enough to really control the stock market, which either will reassure you or scare the daylights out of you.

Bottom line: we are at a decisive support point, at the 50-day moving average. It is necessary to see whether that holds before making any larger predictions. In the short term, SPY may be oversold, but that does not mean we should expect to see new all-time highs any time soon. Essentially, everyone is watching the 50-day moving average. When everyone is watching support like that, it tends to break, because nobody wants to buy until it is "safe," and it isn't safe until after things look darkest.

I look at a few more general topics below that may be of interest.

IBM

As stated previously, IBM has been and remains a fairly good bellwether for the market in general. The chart below suggests that IBM is at a make-or-break third retest of its recent lows. Watching IBM will usually give a clue where the overall market is heading, particularly since it is such a key component of the Dow Jones Industrial Average. Warren Buffett hasn't made much noise recently about his stake in IBM, but he's on the record (perhaps facetiously, who knows, but more likely not) as saying he would like the price lower anyway.

IBM daily chart through August 16, 2013

Long-Term Trends

Stocktwits posted the below chart, thank you, stocktwits (a great trading site). The chart pretty much speaks for itself. My interpretation is that, within the sort of longer-term sideways move we are in now, the market also tends to go sideways in a much compressed fashion after recovering from the final sell-off. This can take years, which can be necessary to "wring out the excess" and bring down multiples until they are attractive to new buyers again. So a breakout will have to wait. If we do get a real correction, it will be a doozy.

Only then does the market finally break out to a new, higher plateau with a good multiple expansion. The odds of a sharp break higher from here  (to, say, SPY 2500) in the intermediate term are not high. We remain within the plateau founded in 2000 and could see extended consolidation within the SPY 1600-1700 range, with a feint lower before the power drive higher. The sideways move is getting fairly long in the tooth. This is a good chart to revisit now and then.

Seasonality

The charts below speak for themselves. We are entering what traditionally is the weakest part of the year for stocks. Why? It doesn't really matter, it just is. Some good guesses are: expenses related to the start of the school year, Jewish holidays, and paying for summer holidays.

Declining Volume

Volume this past week was lower than any week since 1997. That seems odd - but volume has been declining steadily for years, so maybe it's not so odd. And it is the summer holiday season - right when you would expect volume to hit a low. Not sure this means anything at all, but it is of interest.