Wednesday, July 27, 2011

Debt fears drive markets sharply lower

Today the S&P 500 gapped lower and continued to sell for the majority of the trading session. Traders and investors are clearly nervous that members of the US House and Senate will not be able to reach an agreement in the short term.

As I posted yesterday, I expected increased volatility as we near the August 2 deadline--and volatility usually means selling. However, even I was surprised by the ferociousness of today's sell-off.

Technically, the daily $SPX chart suffered a lot of damage. Both the 61.8 fib and the 50 moving average support levels were broken and prices closed near the lows of the day. However, it's difficult to put much meaning into this sell-off as it was driven purely by fear and not technical factors.

Fear drives the SPX daily below several key support levels

Whatever the reasons, I'll continue to use the charts as my guide. The markets are now very oversold and due for at least a short term bounce, but when that will happen is anyone's guess. My suspicion, as I've written about previously, is that once a debt agreement is made in the US the markets will rally.

Irregardless of an agreement, the SPY filled a key intraday gap today and that alone may be indicative of a bounce in the coming days. I personally took a small long position close to this level as I believe the markets are due for some short term relief. If we continue to fall tomorrow, I will re-evaluate this position based on several factors such as decline velocity and volume.

Gap filled after near continuous selling on SPY 10 min

Please note that even though today's sell-off surprised me, I did not expose myself heavily to the long side--instead opting to slowly accumulate on the way down. The advantages to this approach are minimal losses and the opportunity to buy stocks at lower levels. It is especially important to remain prudent when there are so many political and economic unknowns looming in the near future.

Going forward into the last half of this week, remain cautious and do not weigh yourself too heavily on the short side. The market is incredibly fearful right now and that usually signals that a turning point is near.

For my latest thoughts throughout the day, be sure check here regularly and follow me on twitter.

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