Markets grind sideways setting up for possible move higher--then lower

The S&P 500 continued to grind sideways today, closing positive by just .09%.  This is in line with my expectations as outlined in yesterday's post.

As long as this market trades sideways, the odds increase that we see a push higher in the coming days or early next week.

Note the bear wedge pattern outlined in green arrows

Please note that we are still trading within a macro bear wedge pattern signalling that the markets will ultimately trade lower whether or not we trade higher first. This means that we are looking at two trade setups within a single pattern: (1) bullish consolidation to push us higher into resistance and (2) a pullback from that resistance triggering the bear wedge.

Tomorrow, I will be looking for an additional day of consolidation before I am convinced of a move higher in the short term. If we break lower first, the bullish pattern will be negated and will trigger the bear wedge.  And if we trade higher, as I suspect we might, I'll look for resistance at the fib levels in the chart above.

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.

A day of rest for the markets

After a big move up or down, the market usually needs a day of rest before continuing on its way. Today was no exception as the S&P 500 traded mostly sideways and closed fractionally lower on the day.

Today's SPX candle is known as a doji--something created when the price trades within a narrow range throughout the day. A doji means indecision, and that's fitting considering the mix of good and bad economic and earnings news traders have been digesting over the past several days. I expect we'll see a continued move up tomorrow, but any surprise news regarding European or US debt issues overnight could complicate things.

As I explained yesterday, don't be distracted by earnings when trying to make sense of the bounce we're seeing. The current up-move is simply a factor of technical support and contrarian psychology. Continue to hold any longs you may have picked up and be sure to have breakeven stops for each of them.

I'll be watching closely as the charts unfold and will have good resistance levels as they approach.

Wednesday Market Summary

If you read my market summary from yesterday, I outlined a few scenarios we could expect going into today. Of those scenarios, I thought a big rally was the least likely and this is exactly what we got--initially. As I watched my screen this morning, I was a bit surprised to put it mildly.

The culprit for the rally was Ben Bernanke who today announced that IF certain economic trends persist (namely, slow growth) then further economic stimulus MIGHT be necessary. He also indicated that the Federal Reserve would be willing to step in and provide said stimulus, though he gave no firm commitment.

Be sure to read the write-up on this I posted to the blog earlier today.

In any case, I'll continue to trade the technicals and right now we're still in a middle range on the major indices. I'm still holding a couple of small short positions from last week which I'll continue to hold until we reach my target (20MA on SPY daily) or I get stopped out. But until we have a clear direction on this market, I'm very hesitant to initiate any new long or short plays. So far, the SPY has bounced off of daily support levels after the down-move of late last week and early this week. Technically, this is just a bear flag so I'll continue to maintain a downside bias.

Two slight bounces after big down days on SPY

Intraday, the SPY was all over the map. It opened the day at 132.09, up considerably from yesterday's close of 131.40. From there, the announcement from Bernanke sent it all the way up to 133.22, after which it had a steep fall back down to 131.52 before getting a small bounce into the close. The SPY ended the day closing at 131.84. This was very much a repeat performance of yesterday, just with more volatility.

Fading the QE3 announcement

Stay tuned to this blog and to my twitter feed as I keep you updated on this market. I know it's been quiet here in terms of giving out trade setups, but I have a feeling things should start to heat up once we hit key levels. I'll continue to let the charts be my guide and fill you all in as it happens.