Doji candle signals indecision for SPY

Today the S&P 500 (SPY) daily chart ended in a doji formation. This is a classic sign of indecision in the markets.

To match this indecision, we have (possibly) the beginnings of bullish consolidation within an overall bearish wedge pattern. Note the sharp down-move followed by a sharp up-move compared to the sideways trading of the past two to three days.

What this tells me is that the market is poised to eventually move lower (bear wedge), but may need to move higher before doing so (bullish consolidation). If this is the case, I would expect a push into the 50% or 61.8% fib retrace levels before pulling back.

Tomorrow's trading will be the ultimate test of this thesis and if there is a significant pullback I'll revise my analysis. The ideal scenario is another day of sideways trading followed by a push into the upper fib levels and moving averages. But rather than to go long, the better risk reward play here is to go short at the resistance.

As the chart unfolds, I'll be updating my forecast. Check back here and follow me on twitter for my latest thoughts.

Possible bottom on the SPX?

Today the S&P 500 traded all over the map. The index opened higher and traded up for most of the day before flushing sharply lower on the announcement from the Federal Reserve that interest rates would remain low until at least 2013. After the initial flush, the major indices rallied to make new highs on the day.

From the low of today to the close, the SPX closed up over 70 points. This sort of action, combined with very high volume, is a sign of a possible reversal.

If this rally holds into the open on Wednesday morning, I am very cautiously calling for a short term bottom in the markets. I bought a small long position in the SPY shortly before the close of trading and it is already trading up sharply higher. If the rally holds, I'll be looking to sell at the following resistance levels:

Each dotted blue line corresponds to a fibonacci retracement and/or a pivot low or high. The SPX can easily pull back at any of these levels, but I think the best resistance will be at the 61.8% retracement at approximately 1250.

Markets grind sideways towards the US debt ceiling deadline

Today's trading on the S&P 500 followed the same pattern we've seen over the last several trading days. The index opened flat at 1337.39 and then traded down as low as 1329.59 before catching a bid back up to the 1338.51 level. From there, profit taking and lingering debt fears pushed prices back down to close towards the lows of the day at 1331.94.

Whips on the SPY 10 min continue during Tuesday's trading

This kind of trading will persist as long as the US debt crisis remains unresolved. What we're seeing is panic driving futures lower leading to either a gap down in the indices or follow-through selling pushing down prices in the early morning. From there, dips are bought by large funds causing steep rallies in stocks and flat closes on the markets.

As the August 2 deadline approaches without a US debt deal passed, I expect investor jitters to increase as well as volatility in the markets. This was evident today as prices sold off sharply into the close--no doubt traders are looking to protect profits into the after-market session. But as I've mentioned in previous posts, I'm anticipating a relief rally on stocks once an agreement is inevitably made between the two US political parties.

On the daily chart, not much has changed since yesterday. We're still consolidating within Thursday's sharp move up and are trading above the 20 moving average and several key Fibonacci support levels. Assuming a deal is reached before the deadline, and prices don't sell-off, an agreement is the perfect catalyst to cause a rally up from this consolidation pattern and possibly even a hit of the 52 week highs towards 1370.

Consolidation on the SPX could push prices higher in the coming days

Tomorrow will be another mixed bag as the market digests a combination of positive earnings and debt fears. As these factors will effectively cancel out any momentum in either direction, I'm not expecting much action aide from intraday whips.

Be sure to check this blog daily and follow me on twitter for my latest thoughts on the market.

Tuesday Market Summary

Today was very much the kind of day you'd expect after a big move up or down in the markets. Trading on the $SPY was interesting due to a few surprises, but was ultimately muted and confined to a range.

As a contrarian trader, I expect days like this. After yesterday's sharp drop, lots of amateur traders who read about it the night before piled on the short side this morning expecting to drop further. This is a perfect opportunity for the big financial players to whip the market around and stop these traders out. Also, keep in mind that this week is options expiration and erratic trading during this time is somewhat the norm.

Another reason why I expected this market pause is because of the technical support we hit at the daily 50 moving average on the SPY. Whenever you hit a major moving average or support level, you have to expect at least a small pause or bounce--just as I explained yesterday.

From an intraday perspective, the SPY opened the day down slightly at 131.69 and chopped sideways from there. The only surprise move came at 2pm ET when it was revealed that QE3 had been discussed as per the FOMC minutes. The SPY spiked almost 1 dollar on this news but shortly after it was announced that Ireland had been downgraded by Moody's to junk status and this brought the market all the way back in, going as low as 131.36. The SPY closed the day around the lows at 131.45--basically flat.

News whips market up then right back down

This is a good example of why I trade technicals and not fundamentals. Traders who bought the FOMC QE3 spike ended up giving back all their gains shortly after when Ireland was downgraded. For this reason, it's very important to follow the charts and only look to trade the best support and resistance levels. This strategy is crucial to avoiding the whips and saws of the market as much as possible.

Tomorrow is more of an unknown to me. Since we've satisfied the small pause/bounce requirement after yesterday's big move, Wednesday could either resume the down move or have another small up-day. The only scenario that would surprise me is a big move up. And of course, this assumes we don't get any other surprise news out of Europe overnight or pre-market.

Keep following this blog and my twitter feed for my latest thoughts. It will be interesting to see how the market digests Ireland's downgrade overnight. In the next few days I expect to have more long and short ideas on the market and in stocks. I just need