September Strong/Weak Days

This is an interesting chart. Everybody nowadays seems to know that, statistically, September is the worst month of the year for market returns. The above chart takes this idea a step further and shows which days historically have been the best and the worst. Make of it what you will, but the folks at Marketsci Blog claim that incorporating historically strong and weak days into your trading can help make you more profitable.

As they state on their blog:

"The strategy was a real dog last month, but generally speaking, real-time results since I began sharing the calendar in October, 2012 have run inline with the historical test.

The S&P 500 has averaged 0.08% (23% annualized) on the best half of days versus 0.04% (12% annualized) on the worst half.

Quartile 4 days (the worst of days) have been particularly bad, with an average return of -0.09% (-21% annualized)."

They have posts for other months, too, maybe worth a look.

SPY August 29 2013

SPY daily chart August 29 2013

Thursday August 29 2013 saw a repeat of the pattern of August 28 2013: a quick headfake lower at the open, followed by a strong grind higher, until a mid-day high was followed by mild but steady erosion. It was a another green day with a green candle shaped much like the previous day.

Higher Lows and Higher Highs

There was at least one huge difference between Wednesday's action and Thursday's, however. We said that we were looking for higher lows and higher highs, and that's exactly what we saw on Thursday. Despite the best efforts of the Bears, they could not bring the futures down far enough to even approach Wednesday's lows at the open, after which the market quickly reversed in the opposite direction. The Thursday higher were about five points higher than on Wednesday. Thus, we saw higher lows and higher highs on Thursday.

A good omen for Bulls was that SPY closed above its 100-day moving average. The market is acting in standard technical fashion, respecting key technical levels such as value areas, and there is no panic or euphoria, and both Bulls and Bears remain energized. That means that we have a healthy market that is going to be two-sided, and there's nothing wrong with that - it's healthier than the alternative.

The erosion during the afternoon on both Wednesday and Thursday simply means that there are a lot of weak hands remaining in this market. A little distribution out of their hands and into stronger hands simply strengthens the Bulls' case, since the fact that the market abruptly reversed and turned higher after Tuesday's debacle shows that the Bulls are stronger in general since the sell-off.

Another positive omen for the Bulls is that SPY keeps taking out downtrend lines and forming what might be viewed as a Bullish cup pattern, as shown on the futures chart below.

Futures ES 4-hour chart August 29 2013

With the weekend approaching, virtually everyone is anticipating a down day on Friday August 30. When everyone expects something, it usually doesn't happen, but that's being a bit too carefree about the matter. Everyone has a load of anxiety these days, induced by the spectre of the Evil September and Syria and Tapering and all that. That said, mild weakness on Friday would have virtually no long-term significance because it is standard procedure for some to close out positions ahead of a holiday weekend, especially one accompanied by as much saber-rattling as is Labor Day 2013. The afternoon after the bond market closes should be particularly dull, with the big action taking place in the morning around the open.

The Bears still have a case, but they have to start making it. The higher the market bounces, the more shorts will hit the exits or change sides. If the market does not drop on Friday, with everything in the Bears' favor, that's a pretty solid indication that the Bulls retain the initiative for now.

Our longer term view is that the markets will continue to recover higher, and nothing that happened on Wednesday or Thursday challenged that assumption. Volatility has increased, which means larger intraday swings, but it is long way from suggesting any kind of rampant fear in the market. More volatility generally is good for short-term traders.

A test of the long-term downtrend line currently at 1672 is not out of the question if things get in gear and we get some good news. Markets in the past usually reacted well to US missile strikes against defenseless countries, at least in the intermediate term. A peaceful resolution would probably be the best for the markets.

SPY August 28 2013

The Day the SPY Didn't Bark

SPY daily chart August 28 2013

SPY opened weak after indecisive overnight trading. After giving a swift peek slightly below Tuesday's low, it abruptly reversed and headed higher. Once futures crossed 1630, they did not drop below there for the remainder of the day. After hitting the high of the day in the early afternoon, choppiness followed, with a moderate sell-off into the close.

First things first. This is a case of Sherlock Holmes and the barking dog. Most folks know that story, about how Holmes investigated a murder with no good suspects. However, he did know one thing: a dog that always barked at the sign of any intruder hadn't barked the night of the murder. This, of course, solved the case by identifying the one person the dog wouldn't have barked at. It is one of the more famous Sherlock Holmes stories.

The non-barking dog here was the absence of a continued sell-off. If traders really were fleeing for the hills ahead of some apocalyptic images of conflagration in the Middle East, or they simply finally (and way too late for the taste of perma-bears) came to their senses and realized that the US economy has become nothing but a hollowed-out Potemkin Village (sorry, I'm in a literary mood today), you would have expected the reverse of what happened today: a quick failed peek higher, then a slow grind lower. That the markets eeked out any gain today was nothing short of miraculous after the Tuesday rout.

Since that dog didn't bark, we were left with a cautious move back over the 100-day moving average as more and more traders who actually are worried about Syria left the table and sold their shares to stronger hands. Bears will point to the final-hour sell-off, during which the VIX climbed back off its lows of the session, but even that was hardly inspiring or particularly notable.

One can talk about dead-cat bounces, and that might be what happened today. But there was a lot of technical damage to the Bears' case today, despite the late weakness. If you draw downtrend lines from the recent highs, today's action smashed through all of them. The formation developed yesterday and today looks suspiciously like a double bottom when you include the overnight session (as I always do), as shown on the chart below.

Futures chart August 28 2013

This is not to say that we can expect to see 1700 again any time soon. However, if the market holds steady and the fools valiant leaders in the worlds' capitals can hold it together and find a way to resolve their differences without lobbing missiles at each other - at least during trading hours - the market appears a lot firmer than it did at any point yesterday. At the very least, it could go either way, which was not the common sentiment yesterday, with a slight bias higher.

So, yes. Cautiously bullish, though everything is against the Bullish case right now, including Syria, Labor Day, September, and the recent weakness. Keep an eye on today's lows, if they don't hold for any length of time during the cash session all bets are off, with the caveat indicated below.

Chart of the Day

Josh Brown, a well-known CNBC personality, distributed the below chart today that was prepared by Jonathan Krinsky of Miller Tabak + Co in New York. Tuesday saw 92% of New York Stock Exchange stocks have declining volume. That is pretty rare, and only occurred on the days shown during the past year.

SPX chart with days of 90% NYSE volume in declining stocks indicated

The takeaway appears to be that such days are blow-off type days to the downside. Note that those days weren't the actual bottoms (neither was yesterday, today's low was lower), but they were within a few days of that bottom each and every time during 2013. So, even if there is some lingering carryover weakness this week despite today's robust recovery, that doesn't necessarily imply that we are headed straight back down to the 2009 lows. Instead, it may simply be part of a typical and even routine bottoming process.

SPY August 27 2013

Tuesday, August 27 2013, was a rough day for the markets. Futures sold off overnight after the weak close on Monday. The catalyst for the sell-off was late news about Syria and possible missile strikes which all sounded very apocalyptic. The market fell throughout the morning, and continued edging lower until the final hour, when it found a little stability and closed just off the low of the day.

In past summers, we saw a lot of volatility, which hasn't been the case this year until today. Many remember a few years ago when 500-point Dow down moves were followed by similar up moves. The summertime is ripe for volatility, because volume is low and many people are off doing other things. This sharp Tuesday drop appeared to be a perfect example of a catalyst (Syria news) hitting a low-volume market (last week of August) that has been drifting aimlessly in the 1600s for some time. In that environment, you can expect volatility in both directions as short-term traders take control.

The downtrend since the early August highs remains intact. However, downtrends can get over-extended just like uptrends. With the big Tuesday drop, we find ourselves smack dab in the big congestion zone formed earlier this year. It is centered right around where SPY closed. Heavy congestion is one of the most reliable forms of support, as a lot of value was established there.

Ever since the move out of this area (1620s) around July 4th, technicians have noted the many areas of little congestion along the way upward that needed to be "repaired." If nothing else, this move lower could help repair those areas if the market makes a stand here.

But that's getting too technical, nobody wants to hear about poor highs and things like that. SPY did break through the 100-day moving average (and also the key 50% Fib line), but that doesn't mean they suddenly become meaningless. Even when you break support, if it is only a temporary break, the support can still serve to create a rebound. Don't count this market out quite yet.

The next Fib line is down around 1615. Should the market fail to find any strength tomorrow, that is a likely stopping point, at least temporarily. With the Syria news digested and not much else going on, this low-volume market just as easily could rebound to the downtrend line which it was aiming for just a couple of days ago. That is, if the Syria thing turns out to be over-blown and nothing else bad turns up.

The chart could be forming a massive head and shoulders, with the left shoulder topping out in May and the head the early August all-time high. That's something we will be watching in the weeks ahead.

In the short term, watching for higher lows and higher highs. If such a pattern emerges, many shorts will find themselves "in the hole" and forced to cover, starting a chain reaction to the upside. Otherwise, we might simply digest the downward move and move sideways for a day or two within this congestion zone. A quick move below today's low of 1626.5 would suggest significant further downside.