I often say there are a million reasons to sell, but only one reason to buy. Last week, it seemed that any reason to sell was a good one and was valid (and used). Friday's ugly pasting was the culmination of a setup earlier in the week the told us a rejection of prices was going to happen. As we see in the 30 min chart from this past week early highs were rejected on a few occasions. Further, there were several 'fakeouts' during the week where it appeared there would be some follow through buying but that was not to be.
There is nothing wrong with some good 'ole-fashioned' selling. Markets don't go straight to the sky, and as mentioned earlier there are always reasons to sell. Strikingly, some out there were blaming the algos and high-frequency traders when price action gets negative. It's always some excuse, isn't it? I don't care who is doing it - selling is selling, period. If you're trying to rationalize and put reason to the selling, that's fine - but don't let it affect decision-making and judgment. Chart and technical analysis can give you the edge without an emotional bias or irrational response.
Friday's drop is being blamed for several reasons including a mess in the high yield bond area (where it seems hedge funds are having trouble with liquidity and redemptions), multi-year lows in crude as oil is now under $36 a barrel, worries over Europe/China growth and uncertainty over Fed policy next week. Whatever reason makes you content - but selling is selling.
We will look at the SPX 500 chart on two time frames, the 30 min chart (which highlights the action during the week) and the daily chart.
The 30 min chart shows some lower highs, lower lows. But what is particularly troubling was the reversal on Wed 12/9, with the index up well over 20 points only to drop 45 points in a straight line for most of the day. Some buying picked up toward the end of the session but the damage was done. We can see on the chart lower highs until Friday's massacre. Monday's action was strikingly similar to Friday. Further, the momentum indicators never reached overbought territory during the week, another bearish sign.
The daily chart shows the index closing on the lows for the week, and also taking out the November lows. The RSI is nearly to the 30 area where significant bounces have occurred, yet we'll wait for it to happen first. This may coincide with a massive oversold reading and spike in VIX (which may be occurring now). Below there is a gap that is likely to be filled eventually (arrow), but first up there is support at 1985 as price has now broken strong support at 2020.