With the market holiday, all eyes will be on China. Revisiting the SPDR S&P (SPY), even this soon, still makes logical sense to me in the longer-term picture.
On track for first down quarter in quite some time, the concern here is not just the price action but the underlying technical indicators that cover momentum and trend (RSI and Stochastics). Leaving the overbought area on these two indicators has been the most bearish setup for 30 years. Furthermore, although we've had very few MACD bearish crossovers, they have resulted in very bearish moves. It's tough to foresee a drop like we had in 2000 or 2008, or even 1987. But it is important to understand the technical conditions exist. So, while I don't believe we'll see any big drops like the past, it's likely if you asked me in 2000 or 2008, I would have given the same answer. Again, just for emphasis, the same technical conditions exist now that existed then. Since 1995, the only times these conditions existed were, yup, 2000 and late 2007.
We're just guessing at a bottom or direction with price under $197.50. It was clear support that has now become clear resistance. Based on the Fibonacci setup, we've seen a test of the 38.2% retracement level for three weeks in a row, but only one test of 61.8%. I believe we need to see another test of that 61.8% level if there is any chance of feeling comfortable with $188 as a longer-term bottom. Failure to hold that level significantly increases the chances to give back the entire rally that began in 2014. Momentum and trend are extremely bearish right now. The one plus for bulls is exactly how bearish these are at the moment. It may create one more bounce to rid ourselves of the oversold condition. But I believe we'll see $187-$188 again.
What does this mean for investors and traders?
Folks need to stop being in such a hurry for the market to fix every pullback immediately after it occurs. If you're an investor, then invest and don't get sucked into daily transactions.
Pullbacks, even steep drops lasting 1-2 years, have ultimately led to new highs once reversed. The entry after those long pullbacks has been a green quarterly close exceeding the highest close of the previous two quarters. This is where scaling into entries comes into play in a declining market. It's next to impossible to catch the bottom, but sometimes we can get paralyzed by waiting for our perceived perfect entry. Take partial positions if you find something you really want to own.
Correlations in very volatile environments, especially to the downside, approach 1.0. Even the most bullish short-term setups will struggle if we head lower while remaining in a highly volatile environment. If we begin a slow grind lower, rather than these constant gaps and 1%-plus daily moves, we should see the strongest technical setups begin to work again.
I hate to send everyone home in a disappointed mood after a long weekend, so I do have five names that looked like they have bottomed here on a technical basis (and they have some fundamental news behind them as well, which is a plus in this market).
Chemical & Mining Co of Chile (SQM)
TreeHouse Foods (THS)
LG Display (LPL)
Vera Bradley (VRA)
Francesca's Holding (FRAN)
I hope everyone has a safe and relaxing Labor Day, but keep an eye on China. It is still a must in the short term.