On Friday the SPDR® S&P 500 (NYSE:SPY) saw heavy trading as 118.4 million shares changed hands with volume up +71.5% higher than the typical daily trading average of 69.06 million shares. This quarterly phenomenon takes place on the 3rd Friday of March, June, September and December, with stock market participants closing out futures and options contracts ahead of expiry, resulting in heavy trading volume amid printing of a potential bullish divergence between price and relative strength in the ultra near term.
The S&P 500 (SPY) closed modestly lower Friday finishing down -1.3% yet only down just -0.57% for the week or losing (SPX) -$25.59 points for the week and down -1.98% for the month so far or $-89.69, with the benchmark up +18.06 and YTD.
Oftentimes when we see heavy trading in the SPY exceeding 110 million shares changing hands in a day, that usually results in a turning point for the market—an initiation impulse or an exhaustive impulse. Although, one last shake out is certainly viable before the benchmark recaptures the widely followed 50 MA.
What is concerning, however, is even though the market is approaching a short term oversold level, SPY did close below the Chandelier exit in the last couple minutes of trading Friday. Failure to recapture that level in the next couple sessions could weigh heavily on the market in the near term with the 200-day moving average a long way down.
Whether Friday marked an initiation impulse or exhaustive impulse will reveal itself in the next few sessions.
The chart above shows the SPY closing at the 50-day moving average on Friday almost to the penny which has been holding up as support pretty well and a bounce here is a reasonable expectation, except for the timing. September-October have historically been a challenging time for stocks and for the S&P 500 to be testing the 50-day moving average now is surely making numerous investors nervous; everyone seems to be expecting a market crash or a deeper correction.
Although a bounce here seems likely, any bounce here at the 50-MA may not get very far using seasonality metrics, leaving the 50-MA vulnerable to another breakdown as weakening breadth and a greater amount of stocks in the S&P 500 trading below their respective 50-day moving averages.
Having said that, the market often does what no one expects so if everyone is buying puts or outright shorting stocks, that would suggest it could be the very catalyst that drives the market higher in the short term.
So, with the market closing above the 50-day MA on Friday, that is a short term positive technical development and as long as the benchmark can continue to close above that widely watched moving average, that would increase the likelihood of the next Fibonacci confluence of resistance to be tested near the $452.5 level or +2.5% higher.
A break out above that level would also increase the probability of an advance up to the secondary Fibonacci extension confluence resistance near the $465 level or +5.5% higher with the next Fibonacci extension near the $473 level or +7.2% higher should we see a sustained breakout above $465.
Any close below the 440 level in the ultra short term, would increase the likelihood of a confluence of Fibonacci support being tested near the $433 level or -1.7% lower, with the secondary confluence of Fibonacci support being near $424 or -3.8% lower. Here there's an increasing probability of a more significant confluence of 61.8% Fibonacci support being near the 200-day moving average currently near $406 or -9.4% lower, the level that many analysts are anticipating should high yield bonds start to roll over.
Zooming out to the monthly chart, the 10 month moving average has held as support since 2010. Only losing that critical support level a handful of times, the 10 month MA is currently at $409.45 with Chandelier support near $387.53. The chart below is a monthly chart and the RSI and slow stochastics are in unfavorable configurations with both turning lower with stochastics already on a sell signal. This is the longest stretch where the S&P 500 hasn't touched the 10 month moving average in over a decade.
What could have an adverse effect on the market this time and what could put the "Buy the dip" crowd on skid row is that this time around the Fed is tapering its bond holdings. The Fed's balance sheet has ballooned to 7.7 trillion with a very real probability of the Fed exceeding 8.5 trillion once the tapering process has wound down sometime in mid 2022 with the majority of the Fed's holdings of treasuries having short maturities.
How the market perceives the Feds forecast of economic growth, and more importantly just how "transitory" inflation is. could cause unintended consequences regarding riskier sectors of the market, should the high yields bonds begin to roll over which could spook the market and a much deeper correction could unfold.
When stock market leaders break down
When or if we see leading stocks significantly breaking down, like MSFT, AMZN, TSLA, AAPL, FB and high yield corporate bonds, could signify that more than a "stealth" correction is under way and could be a leading indicator of a deeper correction coming to fruition,
Options data shows that a massive amount of far out of the money October and December puts traded on Friday above the ask, with a significant amount of in the money calls trading on Friday near the lows of the day also above the ask.
The unabridged version of this article was originally featured on DayTradersGroup.com