What happened on Friday? The action was pretty compelling, and it even seemed to be a holdover from earlier in the week. So, was that bull market activity – or just a fluke?
Unfortunately, if we are truly in a bottom, then any movement to the upside is part of a long process. Reversal patterns are powerful, and when they are accompanied by declining volatility, we will have a clearer picture going forward.
Nevertheless, the market action caught people’s attention, and I was asked several times last week to provide an analysis of a more predictive nature. If you know my style, then you know that is not my approach. Instead, I will watch the charts and technicals, analyze the information, and then make an assessment. I have learned that when we try to anticipate an outcome without having a mountain of confirming evidence, we are often taken back on a counter move.
Let’s look at last week’s action. During my webinar on Thursday, I mentioned that the jobs number was irrelevant to the market, and that due to the fall in volatility (the VIX fell sharply Wednesday and Thursday), there was little to worry about. Fear was going down ahead of the jobs report. However, the report was a big disappointment; we gained 144,000 jobs rather than the 203,000 that was expected. As a result, futures dropped more than 30 handles, and when the markets opened, the Dow Industrials plunged a whopping 200 points after being up 140 points on futures at one point before the report was released.
The panic set in, but it was short-lived. The markets staged a powerful rally to close at a high for both the day and the week. This was notable, nothing that I would have anticipated. 
But now we see some good evidence that we could proceed with caution and move slowly toward bullish portfolio positions. The word here is “caution!” I will look for improving charts, better internals, positive technical data (like MACD buy signals), stronger momentum, and overall better price action.
As we see from the chart of the SPX 500 to the right, the reversals staged on Friday were on higher turnover – movement was nearly 50 handles from low to high. Price and volume improved all day long, and when the market turned green, it did not turn lower – a marked change in character that really caught my attention.
So we are back to asking: Was this a one-day wonder of bull market activity? Or was this just a setup for a fall as we get started on earnings season? Maybe there is something else lurking to trip up market players. It’s too soon to tell, and of course I would never rationalize and make that assessment anyway. Most stocks are still stuck in a bear market. The SPX 500 is off 5% and the Dow Industrials are down 7% for 2015. Friday’s rally, while a powerful first step, is potentially just that. Some traders believe a market with no memory from day-to-day needs to be played accordingly, and while that is true, we have to be open-minded so we can spot a shift in the trend.
With volatility trending lower now, traders are becoming less inclined to believe big range moves are going to happen down the road. This is a fact based on the VIX chart and option activity we have been seeing. The oscillators are racing higher now, and will be overbought in a few days. The last time they were overbought, the SPX dropped 140 handles in a short amount of time: from the day the Fed announced they would not raise rates to this week’s low.
We are not out of the clear at all, but if we are stubborn and refuse to accept that changes in direction occur (were you prepared for the swoon in August? Not many were), then we will lose trading opportunities. Keep your eyes peeled, and stay alert!
