What a week. Just when we thought the market was breaking down it found support at the 200day MA not once but twice and on Friday’s test the SPY then reversed and pushed through both the 8 & 21day’s MAs; pausing at a short term trend resistance.
We finished with a weekly reversal doji candle. It would be difficult to argue that the near term is not bullish with the 200day holding, the weekly candle and the daily solidly up all day through the 8 and 21 MAs.
But that is now the past. What about next week? I can see a few likely possibilities.
- We push through the downward trend line resistance and continue up to a convergence around the 170 area and or trend resistance. I feel given the strength of the move Friday this is the likely the case.
- Something geopolitical happens over the weekend and the SPY reverses as it finds resistance at the 50day and the 267 horizontal resistance. All things being equal this is a possibility but I feel has a lower probability of occurring.
- So is the first scenario plays out and we continue up into the next resistance areas, those are the 170 area, the 100day MA and downward trend line. If we find resistance there the SPY continues down to test the 200day or triangle support.
- It that resistance doesn’t hold, we continue up and test the open gap at 280.
These scenarios my seem simplistic (either we go up or we go down) but I assure you, I haven’t seen the Bull and Bear cases so equally matched and both sides will be fiercely defending their positions.
What is my personal feeling of what plays out and would like to see happen? That is a complex question. I do not want to see the market suffer a 40, 50 or 61.8% correction and people feel the pain that comes with that. I’ve been through it and its not fun. People lose jobs and retirement accounts. But do I feel that a continued correction is the best thing for the VERY over inflated market propped up on quantitative easing since 2001 and historic central bank debt levels… Yes.
If we were to test the highs again without a more meaningful pull back than the 10% we had in February, the danger is a much more severe and prolonged period market turmoil if we test the highs now. It is a lot to go into here but without a resetting of the in-balance of capital and debt markets (in short) the global economy simply cannot continue fueling the market through ‘easy money’ infused into the global economy. Their balance sheets are at historic levels and are already in the danger zone. Continuing adding to these levels would run the risk of not just a correction and recession but a full out depression worse that 1929. Now this is not a certainty but rather a very real possibility noted by Economists and Financiers around the world at the moment.
So would I prefer a little bit of bullishness to test the highs and a possible double top, or would I like to see the markets reset now for a more prolonged period of expansion? I choose the latter and why I would like to see resistance hold and see a continuation of the correction down to a total of 30-40%.