The takeaway from Tuesday's selloff depends greatly on your overall market view. Bullish trend followers will point to the undeniable fact that the SPDR S&P 500 Trust (SPY) is still above the 21-day exponential moving average and the very shortest of trend lines (dating back to June 2). Bears will complain about the growing sense of complacency, negative divergence in the RSI and perhaps the distance from the ETF's 200-day simple moving average. More neutral, day-timeframe types will simply give thanks for the uptick in volatility.
In my view, you should recognize and respect the short-, intermediate- and longer-term trend, all the while keeping an open mind and maintaining a willingness to move with the market, rather than against it.
With that in mind, the chart below illustrates (via the recent doji candles) quite clearly that the SPY has been running on empty where momentum's concerned. And with the month-long uptrend line resting relatively close to Tuesday's intraday low, any additional selling would likely result in a quick trip back toward the still-rising 50-day simple moving average (SMA). Put another way, while the pieces are in place for a short-term dip, the relative proximity of the 50-day SMA (roughly $4 lower) would suggest that intermediate- and longer-term participants should remain calm and stay the course.
As you would expect with any broad-market reversal, stocks that looked great in the morning weakened and gave back their gains into the close. Facebook (FB) and Petroleo Brasileiro (PBR) are two perfect examples of this.
FB has been my go-to tech name since much of the momentum universe crashed in mid-to-late March and then stabilized in early May. But buyers have struggled of late to chew through the supply lurking between $66 and $67.50. This 1.5 handle zone has been tripping up the bulls for the better part of the past two weeks. And the bottom line is that Tuesday's selling tail now provides aggressive short sellers with a logical area to lean against.
PBR is a name I looked at early Tuesday morning and jotted down as a long idea once it closed above $16. Well, not only did it not close above $16, it actually reversed aggressively lower and closed beneath $15 on far-heavier-than-average volume. This high volume reversal, along with the negative divergence in the RSI, places this stock on the do-not-trade list for me. Only a high volume close above $16 would encourage me to revisit the name.
Tuesday's weakness in equities got me looking at utilities. More specifically, I was interested in Exelon (EXC). Not only do I hold shares of EXC in a long-term account, but I figured it being the second-highest gainer year to date (YTD) in the Utilities Select Sector SPDR Fund (XLU) might give it the necessary momentum to break out to new YTD highs. No such luck.
In fact, when I took a closer look at the chart I noticed the quickly deteriorating momentum in the Relative Strength Index and the relative proximity of both the 50-day simple moving average and the multi-week uptrend line (in pink on the chart below). If you have a shorter-term trading position in EXC and that trend line is broken (on a closing basis), I'd keep a sharp eye on the exit. Logical downside support appears to be $31-32.50.
Wednesday's E-Mini S&P 500 futures trading is expected to hinge on which side of 1947 the contract is trading. All trading above that level begins to transition the market away from a (short-term) bearish trend and back toward a more neutral or even bullish one. But as long as we're holding beneath 1947, my baseline expectation is for day timeframe traders to sell rallies and target downside continuation.
As far as specific levels are concerned, all trading above 1947 targets a return to Tuesday's 1952 volume point of control (the level where the majority of Tuesday's volume occurred). As long the contract is being held beneath 1947, traders are expected to target a sustained break of 1944 and retest of Tuesday's 1939.75 intraday low. Downside continuation would then shine a light on 1938 and 1931.25.
Any meaningful decline would be expected to find more aggressive buyers lurking in and around 1925.
Any trading or volume profile related questions can be posted in the comments section below, e-mailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS