Here’s the technical problem I’ve been documenting all week…
The S&P 500 ETF ($SPY), Total Market ($IWV), and Small Caps ($IWM) all formed Head & Shoulders tops in their 15-minute fractals to start the week. I caught the formations ($SPY $IWV $IWM) upon their right shoulders on Monday, after which they all broke-down into the close. At that point, I was awaiting a test of neckline support-cum-resistance, which we got with a rally the very next day. That rally has since faded — a rare bear trap followed by a bull trap — morphing the charts once more.
Just before lunch today, I noted the troubling pattern developments that had resulted, and into the close it appears like these progressions are playing-out accordingly:
Hence, there were no confirmations, so I haven’t taken any action thus far, beyond selling a couple losers ($CREE $VLKAY¹) for idiosyncratic purposes yesterday. Right now, we’re resting on neckline supports for all major indices ($SPY $IWV $IWM), so this is a critical juncture to watch into the weekend:
Downside targets would be as follows:
1st support: -2% @ $195 (daily ST bull channel’s trendline support)
2nd support: -3.25% @ $192-3 (both daily LT bull channel support & resistance-cum-support from 5/2014)
The most likely outcome is always the worst thing that can happen²: both a flat trade into the close, leaving SPY at this neckline support over the weekend, then a -1% open on Monday. That would put us half way to 1st support, making tactical cash-raising futile for position traders such as myself.
¹Volkswagen ($VLKAY): I’ll probably repurchase in October, after a bear flag breakdown out of a larger bull channel; there’s a strong analogue for today’s Europe ($HEDJ) and 2011’s US ($SPY) between QE2’s announcement at Jackson Hole and its actual implementation, during which lag the market underwent its last correction to date.
²”The stock market maximizes pain for the maximum amount of investors.”