The S&P 500 Index (SPX) of large cap stocks has just finished its worst week in three years – down 65.23 points for a net weekly loss of 3.15%. It lost 1.6% on Friday alone. Look out below.
The bears have been waiting for something like this for more than a year. In a market that has tripled in value since 2009, and which has now gone 68 months without a 20% correction, the law of averages says there’s got to be a break sometime.
So is this the time? Maybe, but we aren’t ready to throw in the towel on the Bull market just yet.
The trading last week was downright scary. Friday afternoon the market dropped 20 points in an hour and closed at the absolute bottom tick of the day on heavy volume – the sort of performance that leaves traders running for the exits. The only buyers were shorts desperately trying to cover before the weekend.
Today we will be watching nervously to see if the same scenario will play out. We are half expecting a bounce here, though– or at least a sideways consolidation – before the decline resumes.
Expect a Wild Week
There is a lot going on this week. This is what traders call a quadruple witching. The options for the market volatility index (VIX), the S&P500 Cash Index (SPX), the monthly options on the S&P 500 mini-futures (ES) and the S&P 500 futures contract (ESZ4) all expire this week.
There are Fed Open Market Committee minutes being released on Wednesday, as well as the crude oil inventories. Jobless claims come out on Thursday.
And there are only 12 more trading days left in 2014, before annual bonuses will be tied to the year-end close. There will be strong attempts to slap some lipstick on this pig. It might be a good week to do your Christmas shopping, and let the market zig and zag without you.
How to Trade It
The SPX has broken all of the short-term support and is sitting just above the 100-day moving average. All those broken support levels will become resistance, and attract new sellers as the price approaches them.
As long as the price remains below 2033 – last week’s final breakdown point – traders will believe the market is teetering on the brink of an intermediate-term correction.
The key line today will be around 1950, which is close to the 100-day moving average. If that key line breaks, an intermediate-term correction has probably begun, with an intermediate target around 1750.
If it holds, we may see a bounce from the FOMC meeting Wednesday. But don’t get sucked in. The short-term view is bearish, and the bounce, if it occurs, is more likely to be a sucker’s rally than a change in direction.
If the market moves above 2033 this week, there may be more life in this bull. If it doesn’t, expect the decline to continue into the year-end. In either case, we think the high for the year has already been posted.
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