This morning I woke up with an optimistic view on the equities market headed into Monday. But, now that I’ve taken a closer look at the SPX charts, I’m not as confident.  As a matter of fact, I’m flat out worried.  I know I shouldn’t read too much into last week’s action – it was a holiday week and there was basically no volume on Friday.  So, even though I’ve lost some of my confidence, I’m not betting against the market it till it forces me to.

So, what my main reason for concern?

As a short-term trader,   I watch SMAs on the daily charts to get a general sense of the market direction.  The two I look at first are SMA10 and SMA20.  I’m a happy camper to the long side if SMA10 is running above SMA20.  Well, last week we saw an abrupt reversal in SMA10 and it is now solidly below SMA20.  Take a look at the daily chart below. Every SMA10/SMA20 cross to the downside (yellow arrows) saw significant market slides before recovering back up.  Are we about to have that slide?  If so, to where?

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Downside scenario…

Let’s first look at the SPX weekly for the big picture –

The white lines represent Fib retracement..  This would imply a possible market pullback to 1125… you can see where 1125 +- acted as resistance earlier in July-Aug time frame.

However, let’s zoom in a bit and see if there are levels of support above 1125 to contend with before considering that much of a pullback.  On this chart (closer in weekly), the purple lines represent Fib retracement based on the latest move up from just over 1000 to 1225.  Notice that we’ve pulled back two weeks in a row now and tapped on Fib just under 1180.  I fear the fall below, but am encouraged that it continues to bounce. Does this mean that we’re consolidating for next move up?  Maybe, but it sure feels heavy to me.

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Now let’s focus on the daily again…

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Bollinger bands are starting to close – big move appears to be right around the corner.  Notice that the daily has pulled back to Fib retracement a few times over the last 2 weeks (white arrows).  Also, SMA50 and Fib retracement are right on top of each other right now.  I’m concerned about 2 things and they are similar to what I was watching last week – First, we need a move through SMA20 to take the bearish sentiment out of me.  If SMA20 continues to prove too strong, then all eyes are on 1175 range (fib retracement and SMA50).  There is a lot of empty space below, so a fall below could make for a swift and significant pullback.

In summary, I’m still positioned long, but am getting cold feet.  The market could still go either direction and hopefully Friday’s low volume pullback was nothing more than consolidation.  However, we need to stay nimble and not over expose ourselves long.

See you Monday.



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