Thursday, July 21, 2011

Another big up-day for the SPX

The S&P 500 traded sharply higher today up nearly 18 points, or 1.35%. This rally came presumably on the back of good earnings reports and optimism that US debt ceiling negotiations may be close to an end. Progress in Europe in securing a bailout packages also helped to buoy prices.

Readers of this blog will know that I don't believe in fundamental explanations of market moves. As I've written numerous times, this 50 point rally we've seen so far since Monday is based simply on technicals and contrarian market psychology.

You'll recall from my previous posts that last week the market was oversold, overly-bearish and into technical support at a key 61.8% Fibonacci retracement level. Interestingly, traders last week and over the weekend were as bearish as they've been in years--this is what gave me the confidence to call not only for a pause but a significant bounce in prices this week.

Monday's hit of 61.8 fib level leads to big bounce on SPX

Psychology plays an important role in determining the short term cycles of the market as big financial institutions look to shake out smaller traders from their short positions and devalue their put options. Once these same traders have been discouraged enough and become bulls, you can be sure the market will reverse and correct downwards. Combine this this contrarian psychology with good support and resistance levels and you will see powerful moves in the market.

If you were monitoring intraday trading on the SPY or any other major market index, you saw these concepts in action on a micro level. At approximately 12:40pm ET, the SPY rallied sharply on a rumour that debt negotiations had concluded, only to fall back sharply 10 minutes later on another rumour that a deal had not been reached. Both of these reports turned out to be either inaccurate or unsubstantiated and the SPY continued to trade upward as normal.

SPY 10 Min whips up and down then continues sideways

Going forward, I'm no longer strongly bullish although I think the likelihood of further upside tomorrow is reasonably high. I mentioned earlier this week to look for resistance at the 1340 and 1356 levels on the SPX. Today, we breezed through 1340 but 1356 should continue to act as resistance should we reach it. I may consider picking up some short positions if we reach 1356, but I will keep them small and maintain a tight stop.

Check back here regularly and follow me on twitter for my latest thoughts on the market.

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