SPX Crushed Early, But Recovers For A Positive Gain

The SPX finished 6 points higher though not before being down 20 points early in the session in another wild and volatile day of trading. The market snapped an eight day losing streak and in that time it had been down almost 10%. Despite the size of the drop, the VIX did not make a new high which was set earlier this year on March 16th even as the S&P had already traded through the low of that same day, which was also the YTD low for the S&P. Nonetheless, there are some key items that have come out of today’s activity.

Firstly, the SPX made an unmistakable bottoming tail on the daily chart. Volume on this reversal is also extremely high and even eclipsed yesterday’s surge in volume. This will not be a long term bottom, but it means that a rally, if only a brief one, is in order. The reason why the bottoming tail is valid and has a high probability of playing out is because the market traded lower for eight consecutive days before making the tail and positive close today. Also, key levels were pierced while making the tail on the chart.

Secondly, MAJOR levels were broken in the last two days, however NONE of them have confirmed – yet. The major levels are the neckline of the shoulder head shoulder top which is a pattern that stretches from the middle of February and was broken through yesterday. The second level is the pivot high from December 29th which was the last high of 2010. The third level is the pivot low of 1249 made on March 16th, and the fourth is the 200 MA. The last and most important level was the trendline going back to the lows of March 2009, which runs through August 2010 and coincides with the 200 MA. Those of you who watch my video analysis will remember the particular trendline I am referring to.

To make myself clear, not ONE of these levels has been confirmed below despite what you may hear on major media outlets.

Ultimately, I do believe we will see a small rally back to at least the 200 MA that should be induced by some short covering. The market has a solid chance of gapping higher tomorrow, perhaps to 1275. If it does so, I would expect it to reach the 200 MA before long but I cannot be certain if that will be strong resistance.

Moving on to TLT, we can see that treasuries have made a topping tail which is inverse to what the equity markets have done. This makes perfect sense as treasuries do well in the risk-off environment and equities do poorly. However, given the overbought nature and the obvious topping tail, a short on TLT (or long TBT if you wish) is there for anyone who wants it. Downside target is $97, stop out is a close above today’s high.

Gold slowed down today after the market reversed but there is still no topping pattern on this chart and despite how extended it is, I would not advise shorting. That said, there is a lot of noise making its way onto mainstream news about how gold is the only safe haven etc. – gold is the best safe haven, but always be a contrarian and follow your gut. When any asset is already up 10% in such a short period of time and it is continually making new all time highs while the mainstream media praises it, it is usually a good idea to start hedging or taking profits. Those of you who have been with me for a while know that I used the same methodology to get out of silver just days before the peak in April.

In any case, this is not a time to be taking risky trades, this is a time to protect and try to make it through this volatile period until the dust settles.

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

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