Halloween commercials before Labor Day? Is it Pumpkin Spice season already? Sure, it’s been unbearably hot, but are we really so eager to send summer on its way? What a terrifying idea.
With all of the scares being stirred up of late, it stands to reason that Federal Reserve Chairman Jerome Powell would further spook a market that had already been on a two-week slide after a two-month rally, with his hawkish comments from Jackson Hole last Monday, that further interest rate hikes are likely for the foreseeable future. As soon as Powell spoke, a market that had been enjoying a fine premarket rally went into a tailspin. By Tuesday morning, the sell-off turned even more severe but if it proved anything it was that the plunge before the unofficial end of summer was just gaining steam. By the time the calendar flipped to September on Thursday, the SPY ETF, which tracks the S&P 500 index, fell to 390.04, before staging a rally up to 396.78 right before the close, a far cry from the August 16th high of 431.73. With traders emboldened by a favorable employment report, the market rallied hard after the open Friday morning up to 401.56, and it looked like the bulls would be going into the long weekend with their heads held high. However, the doubters prevailed by the end of the day as a frightful afternoon drop grabbed serious momentum, bringing SPY back down to 390.33 before rallying modestly to close at 392.24.
Now the question is, as many traders and their families head to beaches and barbecues for Labor Day Weekend: Where does the market go from here? The answer just might be found in where the market got down to over the past two days.
The chart above shows the week's action in SPY beginning in the premarket Tuesday, when last week's sell-off began to intensify. For clarity's sake, the post and premarket sessions are in gray, and the intraday sessions are in white. The double bottom that SPY put in on Thursday around 390 (circled on the chart), followed by a rally of more than $6 to close, and the strong continuation from post-session Thursday into Friday morning would normally calm any fears of a further retreat. Yet, there was an $11 sell-off that began right before noon on Friday which was ghastly indeed. Still, the fact that SPY held 390 twice in as many days should provide some hope to those who believe that the worst for this market is in our past.
SPY holding the 390-price point on consecutive days should not be ignored. The daily chart for SPY shows a significant area of support at just that price right after SPY made its low on the year at 362.17. Key in interpreting the support for what it is, is that the first high after the 362.17 low, and the last low before the most recent high of 431.73 were both right around 390. There are also several other highs and lows at that price that further confirm this as a support area. Any time the market retraces back to an area of clustered activity at a particular price we have support on the downside and resistance on the upside. The support then gains confirmation when it correlates with notable activity such as an 18-month low or the most recent highs. Thus far, SPY has managed to ever-so-barely stay above the crucial 390 support level, a price that perfectly fits the profile for support.
The volatility we've encountered over the last week clearly illustrates that predicting what the market will do from one day to the next is about as futile as trying to catch ghosts. The market had been on a steady upward march since mid-June, before beginning a three-week decline almost exactly two months later. Does this mean that the uptrend is over? One talking head or another on CNBC the other day even referred to the most recent rally as a Bear Market Bounce. Could he be correct?
Does it even matter?
Traders crave action, and essentially don't care whether the market goes up or down as there's money to be made from either side. However, one vital element to making successful trades is to understand which way the market is ultimately going. This will help to not only get in on the right side of the market, which is the easier path to profits, but to also plan a point of entry for when we feel the market or a particular stock for that matter might turn and go the other way, even for just a short-term trade. On the one hand, we went into Labor Day Weekend down for a third consecutive week. That could be interpreted as a sign of weakness for a market and economy still facing substantial headwinds from all ends of the global spectrum. Yet, we managed to hold support at a key level. Just as the market seemed destined to crash at the close on Friday, that 390 support area stopped the falling knife dead in its tracks, for a second day in a row... and that should be a reason for some bullish optimism. The best way to predict is to prepare and the technical trader prepares by becoming accustomed to support, resistance, and other areas of note on the charts that they look at.
While it's a bit unfair to be stressed about your kids' Halloween costumes and all the junk food they'll be eating up until Thanksgiving even before you've gotten their school supplies packed, and you'd much rather enjoy the last beers of summer than be annoyed with thoughts of how much the big coffee chains are going to charge for a paper cup filled with flavored hot liquid, the sometimes violent ebbs and flows of the stock market need not be a concern. There's a case to be made for both the bulls and the bears. In the meantime, a lot of people get paid a lot of money to disagree with each other (and even with themselves) about what's next for the stock market. If you want one trader's opinion right now, looking at the charts, that SPY so defiantly held support at 390 is a sign to me that the bottom for now is in, and perhaps we have a base in place that will push the market along more of an upward path.
Of course, by some point on or even before trading begins on Tuesday, that could be proven wrong. September's chill is suddenly in the air reminding us that summer is ending, and a typically ghoulish autumn trading season approaches. But there is still plenty to take solace in, such as the changing colors of the leaves, the return of football, and at this very moment, enjoying tennis at the US Open. In the words of the great tennis champion Arthur Ashe, the namesake of the main stadium at the US Open: "Start where you are. Use what you have. Do what you can." In every way, this is exactly how to approach trading each and every day, whether the market is up, or down.
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