Ask the Trader: What The &*^% Happened Today? 24Jan2014 Version

The US equity markets took a pretty good beating for most of last week, so as you might suspect, the most common questions we’ve received are some variant of the title for this post.  The short answer to all is calm down… we haven’t really even moved significantly off the highs… yet.  As for what comes next, that answer is also simple…

We’ll either keep going lower next week…

Or, we’ll reverse and storm higher…

Or, we’ll trade sideways for a bit, then proceed to to go lower… or storm higher.

Anyone who tells you they know exactly which of these will happen next week is a joke… or joking… or a liar… or maybe some version of all of these.  Either way, there is no way to know exactly what will happen.  At best, you can have/develop a thesis for what you think will happen based on which company is reporting, what they are likely to say and how the market will react.  And/or you can take your cue from Yellen and crew.  Or you might just do what we do… watch the price action… accept what it’s telling you… and, most important, trade accordingly.

But we digress.  Back to our regularly scheduled program…

Both the SPY and the DJIA looked pretty bad for the week.

simple trading

simple trading

There was all manner of speculation in the financial press about the cause of the rout ranging from traders having been waiting to “take some off the table,” to tepid company results reported so far.  Late last night we heard another plausible theory related to short covering in 10 Year Treasuries as indicated here by the dramatic drop in the 10 Year Treasury Yield Index.

simple trading

While a short squeeze in 10 Year Treasuries and a consequent fall in yield might seem supportive of US equities (it confused us a bit when we saw it falling with stocks), there are any number of reasons why a simultaneous fall might happen.  These include interesting variations on the carry trade, government intrusion to “support” the economy, and good old fashioned asset allocation.

Whatever the reason, stocks tumbled over the course of last week and even managed to look weak on the daily charts…

simple trading

simple trading

Clearly on both the SPY and the DJIA, we have broken through the 50 Exponential Moving Average and have re-entered previous congestion zones on both charts.  The DJIA is actually approaching the swing entry level we suggested on December 15th.  The real question of course is where to now?

The weekly chart provides a bit more clarity and shows that we don’t need to start thinking about heading for the hills just yet.

simple trading

As the graphic suggests, the SPY is not that far off its all time high.  Further, if the selloff was an anomaly/blip in an otherwise still sound uptrend, the small support zone suggested by 1, should be enough to hold and turn the broader market back to the upside next week.  Even if that support zone is insufficient, the larger zone indicated by 2 should be more than sufficient to stem any deeper bloodletting.   If somehow the SPY makes its way down through the final support zone and into area 3, one might consider changing posture… But not before.

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