So the S&P finally broke through the Nov low on Friday - although not by enough to put all this "retest" business fully behind us yet (theoretically there is still the making of a nice double "W" shaped bottom in place if it bounces up from here). The important business from Friday, though, in my opinion, is that after breaking through and then bouncing up off of the mid 730s in the morning, the bulls spent the rest of the day making a counter-attack, which then ultimately failed when they ran into 751. What was a very strong support on the way down, looks to be what could be a very strong resistance going up. In my mind, this confirmed that going down and breaking that Nov low on Friday was the real thing rather than just the short bounce of last Tuesday.
And, after hitting 751, the bulls' spirit evaporated - things went straight down from there, broke through the original low of earlier in the morning and ended up very near the lows of the day. If you go back and look at this past couple weeks "inverted head and shoulders" - the normally expected reversal breakout to the upside completely failed to get past the breakout point, but the chart has now successfully broken out in the other direction, past the level of the head. The failure of the inverted head and shoulders which was supposed to be an upward reversal, as well as the confirmation that the last important support before the Nov low is now resistance, strongly indicates a continued move downward.
Perhaps we have now moved into a new stage where instead of bouncing between 780 and 750, the S&P will now bounce between 750 and ??? - or maybe this will be a whole new downward leg that will go a chunk before settling into its next shortterm consolidation.
One thing we have learned for sure from the Friday action is that coming back up (and most assuredly it will come back up at some point) - the Nov retest line of 741 AND then the big support/resistance line of 751-752 HAVE to be breached before any upward move can be taken seriously. We can file that away in the old database.
S&P 500 - 15 Minute Chart 10 Days
Here's a chart showing intraday movement since the big S&P break below 800. We spent 3 days in a range bounded by 800 and 780. Then 5 days from 780 to 752 and now we are below the 752 line.
The chart shows a lot of up and down daily movement within the support/resistance range boundaries. If one was jumping back and forth between the up and down ETFs, there would be a lot of back-and-forth action. If one was keeping a very close eye on the support/resistance lines, and managed to make the successful switch each time, one could have made a lot of $$$.
I posted a little while back about watching the 3-day chart for trend determination as it tends to wipe away a lot of the zigging and zagging and helps to keep an eye on the ultimate trend. So lets take a look:
S&P 500 - 3-Day Chart 4 Months
Compared to the intraday (or even the daily) chart, the 3 day is a model of clarity. The downtrend never appears to be in doubt (very strictly, technically speaking, the high of the last bar does go higher than the high of the previous bar (the hammer). This was a judgement call - the same action did not happen on the Dow, and there was never any follow through to the upside - it was the difference between 780 and 777 - basically stalled at the same resistance level.
So, going with my 3-day trend model, I never did get out of FAZ, even though at times my position was more than 30% down (and I was getting frantic phone calls and emails from my friends!). The FAZ position should look a lot sweeter going forward.
One last note - check out the hammer. That is normally a bottom reversal candlestick - but as in this case, not always. When you see hammer, or almost any other candlestick indicating reversal, confirmation by the price action in the next candlestick is always required before taking action. In this case, the next open after the hammer should have gapped or otherwise trended upward - when it didn't, that was evidence that the reversal predicted by the hammer didn't happen. While candlestick reading can give some very impressive market signals, always wait for confirmation before acting upon them.