End Of Day Market Analysis

Overall today the price action was pretty boring in most cases. Besides AAPL and oil futures, we did not get any major price action in the broader indices worthy of discussing. In addition, volume overall on the session was one of the weakest in 2012 for a non-holiday week.

At the moment, I really like the defined risk we have in the S&P 500 Index. Today’s highs will serve as a psychological level for the market overall. If prices start to drift lower I think the 1,380 – 1,390 areas are likely targets for the next leg lower. From there, the price action will likely be driven more by the Federal Reserve’s policy than anything else.

On Friday Fed Chairman Ben Bernanke will speak from Jackson Hole. The marketplace is expecting QE 3 but I suspect that participants will be disappointed. I can only imagine that Helicopter Ben will punt the discussion to September and the September FOMC Meeting. I would also point out that gold and silver saw sellers stepping in at the end of the day today. This selling pressure could point to expectations that QE III is not on the table for Friday.

I wanted to share the hourly chart of the S&P 500 Index and illustrate the key short term price levels which I find to be important as shown below.

S&P 500 Index (SPX) Hourly Chart

SPX - SPY Index Trading

SPX – SPY Index Trading

I am of the opinion that the intraday high today could mark a key back test that has the potential to lead to lower prices. Additionally, should today’s high be taken out an obvious inverse head and shoulder pattern would be triggered that pencils out to new highs around 1,435. A daily close above 1,416 on the S&P 500 Index could lead to a very strong surge to the upside. Thus, as long as price stays below that level the bears remain in control.

In light of the above statement we had some confirmation in the price action in the overall marketplace that supports my thesis. The 10 & 30 Year Treasury futures both traded to the upside. Some charts including my own were adjusted to the December contract which made the price action in the 10 year appear to be quite ugly but it was more a matter of the contract roll forward than anything. Both the 10 & 30 Year Treasury’s bonds exhibited strong price action today.

The Dollar Index futures managed to add to highs from Friday’s reversal as the Dollar surged into the bell. This is not a positive sign for risk assets in general and the Dollar is starting to build a base right at a key support level which could result in some strong price action, particularly if we do not get QE III at Jackson Hole this Friday. Furthermore, the Dollar could extend much higher if QE III is postponed in September. If we do not get QE III in September, I do not think it will take place until after the election.

In terms of the equity indices and sectors that we monitor, the Dow Jones Transportation Index (IYT) was down nearly 1% today. This price action paired with the strength of safety assets like the Dollar is a warning signal to the bulls. Additionally, the banks (XLF) finished the day to the downside after trading higher most of the session. Emerging markets (EEM) also took out recent lows today and traded lower by nearly 1%. The volatility Index (VIX) also posted a near 7% gain today as the VIX closed at day highs and looks poised to continue moving higher which is equity bearish.

The only positive for equities today was the strength in AAPL. Based on what I am seeing, I continue to believe that the bears are in control. I will start to adjust my thoughts on the forthcoming price action should we get a daily close above 1,416. Until then, I will likely continue to look for opportunities that give us exposure to the downside.

Have a Great Evening! Happy Trading!

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Jw Jones