So Now What?

I mentioned a couple nights ago that I felt we were close to a strong bounce and so far the markets have given us a respectable two day bounce. While we may have a day or two left, traders need to be careful about getting too enthusiastic about a new rally forming from here. I want to try and share some of my thought process on how I determine where we are as a market.

Sometimes as traders we get caught up in the day to day noise and forget to step back and look at big picture. This has become ever more prevalent in the past few years as social media has helped speed up how fast we get information. Traders need to be very careful about putting too much weight on any single day or week. In a normal market, tops and bottoms take a long time to develop.

After a three or four month rally, bears should not have expected to markets to continue free falling below the 50-day moving average. The “false breakdown” snap back rally was actually fairly predictable, but now comes the hard part. How far can the market bounce back and what happens then? The simple and true answer is who knows? No one knows. This is why we have to be objective and simply process what we know as a fact.

What we know is that the market has been trending higher since late 2011. This was the first time the bears were able to push $SPY below its 50-day moving average since last December. So far, it looks like bulls were willing to buy the 1350′s as evidenced by the dip in March and this week. We won’t know until we get more information whether the bulls remain in control, or whether the bears are starting to trench themselves in. We need to see if the bears step in and force a lower high, or can the bulls simply continue forcing shorts to cover.

Below is a chart (click for full size) of the S&P 500 as represented by $SPY - SPDR S&P 500 ETF(NYSEARCA:SPY). I purposely went as far back as last year to show how long it took a top to form on the last correction. The markets hit new highs even after the first breach of the 50-day moving average by the bears. And there was much more volume during distribution days.

While this may paint a hopeful picture for bulls, we are headed for a seasonally under performing period, and the markets have clearly lost some momentum. It is quite possible that even at best, the markets may be headed for several weeks if not months of sideways or even downward price movement. That is not a prediction, but certainly a scenario to game plan for. Ultimately, we simply have to wait to see how the bears now handle the bulls counter punch.

Good Trading,

 

Joey

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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