I had been expecting weakness and then a push back toward the close today. I had not expected the market to give back everything it had gained on Tuesday and Wednesday. Analysts are speaking about how the markets still turned in another good week and they did but the S&P 500 moved in one day right down to 1709.91 for 3/4% loss. It is now just 10 points away from the important 1700 support level. Here’s why 1700 and 1680 are so important to this rally.
Market Direction Support Matters
For almost half of July and the first week of August the S&P 500 kept try to break through the 1700 level. Each time it failed it pulled back to 1680 and then would mount another assault on 1700. 1680 became reasonable support during this period but then it broke quickly when investors felt that the US would enter a war with Syria and it seemed imminent that the Fed would taper back Quantitative Easing in September. The break of 1680 was short and swift as investor’s turned fearful.
This all ended when it seemed certain that the US would not enter the Syrian conflict and despite all the talk about the Fed scaling back Quantitative Easing in September the market rallied back up. The market last week spent just 3 days testing support at the 1680 level and then mounted another assault on 1700.
On Tuesday the market direction closed slightly above 1700 but on Wednesday it shot higher when Fed chairman Bernanke announced there would be no tapering yet.
Despite the one day amazing rally, it was definitely overdone but at the same time, support really is non-existent at 1700. This is unnerving to a lot of investors. As it is there is only limited support at 1680 so any solid bad news such as the debt ceiling fiasco and 1680 could quickly break.
What Happened That Changed Sentiment
On Thursday the market was weak but not overly so. Many investors jumped into stocks as you saw through the rate of change which I showed on Thursday evening. They picked up some stocks that had been weak during the day. This made sense to a lot of investors who felt the rally was going to continue now that the “Fed Issue” was out-of-the-way. Indeed I heard many analysts on CNBC comment that it would be impossible for the Fed to scale back now until 2014. Why exactly they didn’t explain.
Today when the market started it was already weak partly thanks to St. Louis Federal Reserve Bank President James Bullard who had told Bloomberg News that a taper in October was”possible,” and he did go on to say it would depend on economic data. Investors picked up on this immediately and the futures at the open were weak. Despite Bullard’s further commenting about his concern over the low levels of inflation the damage had been done. Investors fear everything. On Wednesday they feared they were going to miss the rally. The same held true on Thursday and indeed many in the media pointed to Thursday as an opportunity to “load up on stocks” for those who did not want to miss the next “leg up”.
S&P 500 Intraday Market Direction Action
Today’s one minute chart holds the clue as to what happened today. Around 11:00 AM the market direction was hanging tough with the S&P down just a couple of points. But three rally attempts all failed and volume was picking up. By noon the S&P was down below 1716 and a rally back around 1:00 PM failed to set a new intraday higher high. Volume began to pick up and obviously many investors who had bought stocks on Wednesday and particularly Thursday at what they thought were reasonable prices due to the weak day on Thursday, started to dump their stocks. Fear is always the emotion behind the market and into the close the selling intensified and pushed the S&P down to just below 1710. The market direction tried to bounce back a bit at the close and while failing it did manage to cling to 1710. You can see that the entire day was a series of lower highs.
Summary of Today’s Market Direction Decline
The decline today while disappointing is somewhat to be expected. The rapid rise in stocks was over stretched in the past week and the euphoria over the Fed announcement on Wednesday was definitely overdone. Now that investors have wiped out the gains from the Fed announcement we can really see next week what the market direction will do.
My focus remains on 1700 and then 1680. If 1700 breaks I will be adding Spy Put Options and DXD ETFs to my strategies. If 1680 breaks then the market direction will definitely move back to at the very least retest the lows of the most recent correction. This will be an incredible opportunity for profits if it happens. I will be posting my trades as quickly as possible.
This weekend I have a lot to post as I have quite a few trades to update as well as the market direction portfolio that was stopped out today. Enjoy your weekend.
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