On a 60 minute basis the S&P500 traded the heaviest volume in the last hour of trading Tuesday that it has since the extremely volatile week of August 8th. That was the week, if you recall, that the Dow had four consecutive days of 400 point moves in either direction. The difference between those high volume days and the 3:00-4:00 hour yesterday, which saw SPY trade over 125 million shares, is that it came at the top of what has been a clearly defined trading range. 1,216-1,233 was the range that last hour, or 121.70-123.50 on SPY depending on which one you prefer to follow. One must consider the psychological factors that will now be at play given all the volume that traded in that range.
All that volume represented a whole lot of two things, supply and demand. Obviously those selling thought they were getting out at good levels, while those buying thought they were getting in at good levels. Therefore, should SPX break below 1,216 and move significantly lower (lets put key support now at 1,200), everyone who bought in that last hour Tuesday is going to be doing some second guessing. That second guessing may lead to increased resistance if SPX tried to rally back towards the top of the range. Vise versa, should SPX break out above 1,233, those who sold are going to be wondering if they sold right before the market is about to break out. And even more importantly, those who didn’t buy in will likely be looking to enter the market on any weakness. Furthermore, technical traders who have been waiting for a breakout above the trading range of the last two months will also be looking to enter.
So our thesis is this: a breakout above 1,233 or a pullback that holds 1,200 keeps the “buy the dip” theme of the last two weeks in tact. And while a breakdown below 1,200 certainly won’t diminish the recent uptrend off of the recent 1,075 low, in our opinion, it would set up for a test of support somewhere around 1,150. Watch the VIX closely for a clue, it settled back above 30 Tuesday but was rejected at 35. A move back below 30 on the VIX could signal that SPX wants to trade higher towards 1,250. Meanwhile, should the VIX remain stubbornly above 30 it will pose as a “proceed with caution” sign on any breakout attempts (breakout attempt being a successful close above 1,233).
There’s a flurry of data due out today. The consumer price index (CPI) and core CPI for September, along with last month’s housing starts, weekly crude inventories, and the Fed’s Beige Book report for October will all be released. Earnings season kicks into high gear as American Express (AXP), AMR Corp. (AMR), Bank of New York Mellon (BK), BlackRock (BLK), Cirrus Logic (CRUS), E*Trade Financial (ETFC), eBay (EBAY), Freeport McMoRan Copper & Gold (FCX), Morgan Stanley (MS), PNC Financial Services (PNC), Riverbed Technology (RVBD), Travelers Companies (TRV), United Technologies (UTX), and Western Digital (WDC) will share the earnings spotlight.
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