Readers of this blog know that I've been calling for downside since last week, even in the face of the big rally we saw that brought us nearly to daily all-time highs on the SPY. That prediction ended up being a good one as last's weeks trading has been almost exclusively to the downside. As of now, the market remains weak and in my opinion will continue to be so as long as debt issues in the United States and the European Union persist.
With that being said, it may come as a surprise to some that I'm slightly in favour of some short term upside in the market. My reasoning here is partly based on technicals and partly on market psychology.
On the technical side, the SPX is into some support at a back-test of the blue trendline. This is the same trendline that I expected to be resistance on the way up in late June. Clearly, this was not the case as we surged through it during the Independence Day/Canada Day holiday period. This level also coincides with a 50% Fibonacci retrace and the 20 daily moving average. In addition, the overall chart pattern on the SPX is a bullish wedge/flag/pullback pattern.
|SPX has support within a bullish wedge pattern. Does it bounce?|
On the psychology side, the average trader out there is incredibly bearish at the moment. This isn't a surprise considering the scary macro-economic issues facing the world right now. But as a contrarian trader and marketician, this tells me that the market could be due for a short term bounce as the big financial players look to shake out those who've positioned themselves too heavily on the short side.
In any case, it's important for readers to understand that I'm neither strongly bullish nor bearish at this point. I'm simply suggesting that the market may be due for a short term bounce before continuing back to the downside. However, if there are any negative developments in either the US or EU debt problems over the weekend, it's quite possible that we break through support levels and continue to correct downwards.
I'll be monitoring the news and futures over the weekend. Follow me on Twitter (@thetsxpert) and check this blog regularly for my latest thoughts and analysis.