The S&P had a huge down day after Bernanke’s statement yesterday about tapering QE towards end of the year and ending QE by mid-2014. So where do we go from here? What are the possible scenarios that can occur moving forward (especially for the next 2 days)? Below is my thinking for the immediate term.
Resistance to beat for resumption of uptrend
- 1642 (minor)
- 1655 (major)
- A bounce occurs
- This is a more likely scenario because a defense was mounted around 1645, and again around 1635 yesterday. Based on the action in the overnight Globex market, those long players would probably have lowered their cost basis / losses during to about half. These players would probably attempt another push today or tomorrow.
- EDIT: As at 6.20am EST, ES just tanked another 8 points or so starting around 4am EST (probably as people start to wake up). Looks like a lot of institutions are shorting the ES to hedge their portfolios. This kind of action might really push the market down.
- Two things also stand out from yesterday’s action. Most of the leading stocks were simply not affected by the sell off after 2pm. In addition, the cumulative new highs – new lows actually increased from 390 to 597.
- For the daily S&P uptrend to resume, we should see 1642 resistance broken, followed by 1655.
- If a lower high (vs 1655) develops, that is the best time to get out of longs.
- Market stays below 1622 without bounce above 1622
- If this happens, I wouldn’t be surprised if the 50-day moving average does not hold and a deeper correction develops.
- Get out of longs
- Position yourself for a deeper correction.
In summary, 3 scenarios
- Market recovers, breaks 1642 then 1655.
- Action: Go long!
- Market bounces, attempts to break 1642 or 1655 but fails.
- Action: Get out of longs. Monitor if conservative. Go short if aggressive.
- Very bearish
- Market stays below 1622.
- Action: Go short!
EDIT: Time now is 10.47am EST. The bears have tried to penetrate the 1600 level but have been rejected so far. What is interesting is that many leading stocks are actually being bought rather than being sold down. Some stocks are even positive (e.g. RH, CME, SODA). This does not feel like a real sell-down and seems more like a buying opportunity.
EDIT: By the end of the day, the Dow is down 350 points. Now by price action, the market has already transitioned to a downtrend based on the daily timeframe.