We knew the markets had to pullback after a huge 6% rally last week and today looks to be the start of that pullback. The key now will be whether or not the markets are able to find support. What’s tricky about the current levels in the market is that, in our opinion, the S&P500 can pull back all the way to 1,150 and still be in a bullish trend off of the 1,075 bottom. Why is 1,150 significant? 1,150 marks the midpoint of the last range, 1075-1225. It is exactly 75 points above the 1,075 low, and 75 points below the recent 1,225 high. So to us, as long as SPX stays above 1,150 on this dip, then it should be bought.
The problem child today was our usual troublemaker, financials. XLF sank more than 3%, weighed down heavily by a 8% drop in Wells Fargo (WFC). Even more discouraging was the action in J.P. Morgan (JPM). JPM was unable to stay above its Friday low of $31.40, closing at $31.04. The next key level to watch on JPM is $30.92 as that level marks its low from last week, which was put in the day of its earnings report. A breakdown in JPM below $30.92 will set up a test of the key $30-$30.50 range. Needless to say, a breakdown below $30 could prove very troublesome for the financial sector in general and in turn the overall markets.
Something of note today was the whiplash like rally we saw in the VIX today. After falling below 30 last week for the first time since August 3rd, the VIX snapped back today, rallying 18% for its best one day gain since August 18th. We’ll be watching the 35 level now on the upside on the VIX as that level provided support over the last few weeks. Just like a potential reversal in the VIX’s recent downtrend coincided with a slump for the markets, as we noted it might this morning, a failure to extend past the 35 level might signal its time to buy the dip.
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