Bullish Blues
There is little to like about this market if you are a bull. Yes it reversed some of Friday’s ugliness, but volume levels today were less than half what they were during last Wednesday’s heavy distribution day. This low volume recovery is setting up for a very nice short. At long last we are finally getting some serious volatility and some good trending. It’s hard to see it from a microcosm but if you step back and look at what has occurred over the past few weeks the trend is very clear: Long term support lines broke down early this month followed by several days of heavy distribution. Now while the serial bottom callers are coming out of the woodwork, the major indices have merely pulled back to their 10-day averages on ever decreasing volume. The market could still pull off a recovery here, but from our vantage point the odds are very low that it will. Odds are much higher that we will see another spike down before serious buying interest returns. Don’t try fighting the current here; if by chance the market does recover there will be better long set ups than are now being presented.

S&P 500 Breakdown

SPY

The S&P 500 broke its long term trend last week. Since this time it has retraced 50% of its losses to its 20-day average on decreasing volume. This is an ideal short set up. One of two things is likely to happen here. Either the price on the SPY will drop from this level making a new leg down to its 110-112 support area. Or, the price will move back up to the broken trend near 119.

Bulls should want to see a drop to the lower area since this will create an excellent buying opportunity and a likely hard oversold bounce. If it continues to trade up to the 119 area first it will have longer term bearish implications; especially if it continues higher on anemic volume levels.