The S&P 500 Index has been chugging along to the upside since hitting its most recent low of 1,042 on June 8. At the time, that low was exactly at the lower two-standard-deviation Bollinger band, possibly indicative of an oversold condition. As of Tuesday’s close, we were trading in the middle of these bands.
Since the June 8 low, the broad market ETFs such as the SPY and the DIA have been moving higher on lower and lower volume, which could mean a lack of conviction on the part of market participants. That weakness is maybe beginning to rear its ugly head in the past two days’ price action.
When the SPX began moving lower back on April 26, the price of the index shifted lower during the last 30 minutes of the trading day, accelerating the moves south from early in the day and confirming direction. From June 8 until Monday, the prominent market action was to move higher in the last 30 minutes of the day, leading the market to a net gain in that period. But that trend may be changing yet again and the reluctance of traders to hold positions overnight could be one cause of this.
I remember as a market maker and specialist, one of the main ways (and really the only one way) I had for analyzing short-term market direction was to “read the tape” and watch order flow. In other words, I would look at price action and make determinations as to whether to be long or short delta (direction) at different moments during the day and overnight. While this is not foolproof, it really makes sense when you think about it in the most basic of terms.
I always say that fundamentals drive the long-term direction and eventual price of a stock. Fundamental health (or the lack thereof) is often realized from earnings reports and/or updates by analysts using concrete objective data.
In between those benchmarks, the market is pushed and pulled by a multitude of forces, which include (but are not limited to) emotion, correlation, currency, and technical patterns.
When examining a potential investment and/or exit, all of these things should at least be considered. How and when you ultimately pull the trigger is unique and depends upon your method and risk tolerance.
If you ignore certain popular market behaviors, like late-day momentum and volume trends, you may limit your view of the marketplace as a whole.
As we come into this next earnings season, the market is on shaky technical ground and is having trouble breaking back above and holding its 200-day moving average, which is currently right around 1,111. The 20-day simple moving average (SMA) is at 1,089 and may be a minor support level for the markets. Also to note is that the 14-day day SMA of SPY volume was roughly 344 million when the market was bottoming back June 8 and that average has drifted down to 254 million as of yesterday afternoon.
If you are looking for conviction in a trend, it may behoove you to watch the momentum late in the day to get confirmation. Also remember that the days of reckoning are upon us, with earnings just around the corner.
Photo Credit: ian.plumb
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Tags: bollinger bands, DIA, market trends, options trading, selloff, SPX, SPY, stock market update, Stock Trading, Technical Analysis
