With the start of the National Football League preseason, shorts fumbled at the goal line set by the bad INTC news. Suddenly it seemed, however, volume increased nicely on positive breadth, and major sectors turned green with Oil, Small-Caps and Regional Banks all leading….
This self-reflective post is about particular observations I found interesting last week that will be on my radar to consider at future potential reversal points.
Reversal Sign Posts
- The Russell 2000 sold off Tuesday morning to a low of 588.58. Then Wednesday morning as the market collapsed to lower lows, the RUT sold off to a low of 589.38 — a fractionally higher low. This was the kind of non-confirmation that I often note at a potential temporary bottom.
- We bottomed about mid-week and finally had a bounce on the Friday of what was a third down week. Had I been short, I also would have covered on the INTC induced “scary” plunge that nevertheless held above the highly watched SPX 1,040 level.
- INTC and SMH action after the guide down — Despite the quick plunge, INTC quickly recovered and held green the rest of the day.
- XHB also reversed green and closed up after the repeated negative housing numbers — a positive reaction to negative headlines.
- Key reversal in bonds and TLT on increased volume — I feel that bonds may have temporarily topped out, but we may still see a new high toward the end of the year.
- It was encouraging to see the banks at least participate somewhat during the Friday rally.
- Stocks making new lows contracted in range midweek even as indices printed new lows.
Thoughts for Next Week
We had a strong Friday hammer candle on the S&P 500 index to compliment Wednesday’s with both lows coming off important SPX 1,040 support. This could be the start of the completion of the right shoulder of the daily inverse head and shoulders pattern that started in May. The right shoulder also coincides with a 2-3 day bounce I was looking for around mid-week, and this puts us back into a possible range for another 7-10 days.
However, with the continuing sour economic news and deteriorating technicals on higher time frames, I think the inverse head and shoulder to be the less likely scenario. Despite the late day heroics, the weekly candle will still closed down this week — price is below where we closed Monday, and there is plenty of overhead resistance. Assuming we do blow past the low $107 area in the SPY, the 50-day simple moving average looms at $109 and Monday high around $108.50.
I have to ask myself, was today just some end-of-the-month window dressing? After 3 weeks of down side and 70% of the trading days ending in red so far in August, the bulls may want to take advantage of the light volume and give a bit of push to lock in better results for the end-of-month. In addition, a strong open on Monday morning has been a consistent feature of this market for a some time now.
Next week’s brings the NFP data. Assuming nothing blows up over the weekend I would think the bulls have the edge until mid-week (ahead of the payroll data). However, with the historically weakest month of the year coming up, the bulls will have their work cut out for them. After some range consolidation I am anticipating more downward action. Bottom line, at this point I think the bears will recover and break the lower end of the range.
Battling Emotions During Trading
The shakeout had been fierce since Wednesday. When we have been trending in one direction for a while, it often takes a little time to tap the brakes and turn things around. When I first started trading I would constantly kick myself for missing the low or the high. It’s still the case now (hard to change when adrenaline kicks in), but I have learned that the lows and highs will often give you a 2nd or 3rd chance if you missed it the first time.
The action on Wednesday to Friday of this week is a perfect example. We had tested the mid-1,040 area on the S&P500 multiple times before finally taking off to the upside. I am beginning to see why some refer to trading as a mental game. It is hard not to let emotions get in the way with so many shakeouts and directional changes.
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