The market showed strong support at around SPX 1020, and prices didn't quite hit the 50 EMA. Likewise, many stocks almost hit their 50 EMA (some did), and bounced back shortly after the first 30 min of trading.
Take a look at the SPX chart below - I've drawn a channel starting mid August, and this is the 3rd time the market is hitting that bottom trendline. What happens on Monday and Tuesday will hold little importance, as the market is anticipating Alcoa's earnings release. I still would not recommend entering any new positions right now until it is clear where the market is heading. That is, in order for the market to stay bullish, the SPX must break out of the 20 EMA 1044. If the SPX bounces off the 20 EMA and cannot break, then that is extremely bearish, and you do not want to be a bag holder in long positions at that point.(Also, as a general rule, it's a bad idea to enter in new positions on a stock right before the earnings).
The market has been down 6 out of the last 7 trading days, and some stocks have already broken the 50 EMA and are now showing extreme negativity (X, BAC). Watch the 1014-1020 area extremely closely, as it has tremendous support - once it becomes broken, it'll serve again as very strong resistance. Be extra careful the next few trading days, and remember, do not become attached to any single stock, and you don't always have to be "in the market". Sometimes the best play is to stay cash (or be very well hedged).
I've noticed that the volume on SPY has increased during this recent pullback/downturn. This is different than in previous pullbacks during this seven month rally where volume dropped on pullbacks. Also, it looks like the current pullback/downturn has a little room left to go based oon the stochastics (not yet into the oversold area). Any thoughts on these comments? Thanks
ReplyDeleteYou have a very good point - the increase in volume in this pullback is definitely another bearish sign. It'll be very important to keep an eye on the 1040-1043 level, because that's where the 20 EMA lies on the SPX. If today ends up being an up day on lower volume and we don't even touch the 20 EMA, then I think the market will definitely go lower. I don't like the stochastics as an indicator so much because stocks can stay oversold/overbought much longer than you think, and on the contrary they don't always have to hit below the 25 or above the 75 line. However, given that trading is a business of statistics, the more technicals you have in your favor, the greater the odds of a winning trade. So I can't really speak to them because I never liked them. Remember, the strongest asset you have is the trend. Everything else comes second.
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