Market Once Again Gives Back Gains Before The Close, Bears Still In Control

The market once again sold off in the last 15 minutes of trading which has become the story for the last three days as the S&P has struggled to hold on to the early gains of the session. The good news for the market is that despite the weak showing late in the day, the market snapped a six-day losing streak, something that had not been done since February 2009. However, the good news ends there. Volume on the S&P was just under 2.4B and todays rally wasn’t something to write home about as stated above, the market limped into the close yet again.

The market appears to be forcing a rally before options expiration since there is a high put to call ratio and the institutions always push the market in the opposite direction that the retail investor expects it to go so that they can collect on the options premiums. The weakness in volume obviously indicates a lack of participants and today’s action is representative of a bearish consolidation before news lows are made.

I think that the market is likely to rally well into next week but there will be resistance at 1300 and the market should stall at or just above that area. 1300 is a solid target because it is a round number and a psycological level for traders which is important given that most strike prices are at an even number. It’s also a good level because it leaves room for a rally by the end of next week, but not an overly large one. 10 points give or take is just enough room for the market to shake off an oversold condition of a 6 day losing streak.

I talked about this last time but downside targets are the same, 1227 and 1250, or 127 and 125.50 on the SPY. The absolute bottom before a significant move higher in this market will be at or just below the 125.50/1250 support.

There is a strong pivot at 1250 from the Japan crisis where we had capitulation volume, as well as a seven-day sideways consolidation at the end of 2010 before the breakout in January. In addition, the 200 MA is currently right at 1252.

If that wasn’t enough, here’s an update of a chart that I showed a month or two ago when I said that the S&P was going to reverse and that the equity markets would turn bearish.

The 50 MA coincides with the trendline that dates back to the March 2009 lows. It’s clear that the market will find support right at this trendline before making its next move and will most certainly bounce off of this level that should at least make for a solid swing trade. As to whether or not this trendline breaks is not important to me because it is too far ahead to attempt to trade this one way or the other. Both the bulls and the bears have decent arguments but the only thing that makes sense is to trade what the chart tells you. Otherwise you are putting your capital on the line based on your beliefs and assumptions.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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