The set up was simple and the results are unsurprising.
“Below today’s low and I can’t rely on the similarities from that late Feb pullback to guide my outlook on the market now, other than knowing it’s immediate term bearish.”
-SPY Fillls The Gap, Now Needs To Hold 6/11/13
Hold the low SPY did not and immediate term bearish it was. This is a classic example of key support not holding and then resulting in a continued move lower.
With the S&P500 breaking 1,622 and last trading at 1,615 (as of 2:30 pm est) the burden of proof now rests with the bulls. The bears did their job in defending resistance between 1,640-1,650 and forcing a lower high, and they’ve now forced a lower low as well (that is today’s low vs the previous 1,622 low from yesterday). Key support remains 1,585-1,600 but the mere fact that 1,622 didn’t hold doesn’t bode well for Summer outlook of the Stock Market.
No longer can the pattern to this pullback be compared to the ones that played out in late February or mid-April. Neither of those pullbacks saw SPY endure a 2 day losing streak after bouncing off the key low. Moreover, for the first time all year (barring a miracle), SPY is going to close 3 consecutive days below its opening price. I’m not outright bearish here, because I believe too many other people are, but I do think it is time to start questioning if the highs for the year are in?
As for the answer, I’m not ready to say that the high for the year is indeed in place. There’s still too many things working in the markets favor. Among them, it is still in an uptrend, the VIX is elevated, sentiment isn’t overly bullish, and history shows that after a 5 month winning streak more bullishness follows. However, if the uptrend support from the November lows between 1,585-1,600 breaks then it will certainly look to me that the highs for the year are in.
Whether the highs are in or not, you have to be careful of letting that dictate your day-to-day trading. Volatility comes and goes and if SPX can claw back above 1,620 today, or hold 1,600 overall, the risk/reward would favor a bounce. After today though, any rally that falls short of reclaiming the 1,640-1,650 range would swing that risk/reward back in favor of shorts. From reading my own words as I type them, I guess my bias would be to expect a channel from 1,600ish-1,640ish to play out and don’t get aggressive either way until that channel gets resolved.
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