S&P 500, hitting a supply zone (bubbles) between two major trading ranges
This weekend post will be short again. I have to spend more time with my family, but depending on my my Sunday, I may add the sector charts and relative view charts then.
After Wednesday of last week, I called for yet another bounce. We got this bounce on Friday, but not before we created another U-turn low on Thursday. I am certain that Thursday cost many traders dearly. We broke some significant moving averages and trend-lines with this move, and even appeared to just backtest the breakout into the close on Thrusday, before we got a large bullish reaction. News Media wants us to believe it is because JPM lost “only” 5.8bln in their trading account. Sounds to me as if the Media is running out of apologies why the US markets keep defying gravity.
And while the broad index bounced of the trendline, the Semiconductor sector (see below) already tests it’s July lows. Semiconductors are a leading sector. They often bottom out first and show divergence before a large trend change. The problem with lower lows on Semiconductors is the potential head and shoulders formation in the sector shown a few weeks ago. We could be in a world of hurt if we break this multi year formation. But we are not there yet and I don’t believe it will happen soon anyways.
Amazingly little has changed since last weekend’s post. The market behaved very much like I had expected.
Back to the charts:
Above you can see that we retraced almost exactly 61.8% of the prior down move and that we are hitting an area of Supply (where selling occurs). You can see that we have reversed in the area between approximately 1363 and 1357 numerous times, and even if we did not reverse, we would at least hesitate here.
In the chart below, I have outlined a bullish and a bearish scenario. A bullish scenario would have us go through this zone on healthy volume and backtest it on lower volume. A bearish scenario would get a rejection on very high volume with a long upper wick on the candle. Basically these are the signs to watch out for on Monday, that could tell you where we go from here.
As you can see on the chart above, the break of the trendline could actually have bullish implications, as we often get a false break before a strong directional move occurs. There are many terms for this (Shakeout, Bull Trap…) but it all means the same. Take out traders stops and limit orders before going in the opposite direction.
Daily SPY chart
Let’s not get too much ahead on the bullish side though. Currently the market is a mixed back, despite the higher highs and lower lows. The overlap of this entire move since early July has a corrective character and the volume in each wave seems to decline from the previous wave, showing confusion among traders.
More importantly, once the volume has dried up like this, strong directional pushes usually occur (nobody puts up a fight, so it is easier to push out of a range). Therefore I chose the title of this post. I am expecting a resolution soon.
I still favor a potential violent shakeout, breaking the 1309 lows before heading up again into the Presidential Election Cycle high (4 year cycle).
SPY hourly chart
The hourly chart shows us the decline in the wave volume. The lower indicator is the Advance / Decline Volume, which usually tends to moderate after a strong push in the morning, but did increase into Friday. Could be a bullish sign.
Semiconductors testing the July lows
Semiconductors already tested the Lows of July and got rejected (good). I would prefer more volume on the rejection, but as long as we can hold here, bulls can hope for a mild correction in the broad indices and then more up.
