Retest on Declining Volume, Part 2
In my note yesteday before the market, I wrote the following:
"If you follow this market, keep an eye on 839.8 on the S&P 500 (Dow 7885).  A close below those levels is bearish.  A dip below intraday, but then a close above is actually constructive, to some degree. "
Strangely enough, just hours later we witnessed the dip below and close above.  Let's take a look at the intraday chart of the SPY, below.  I use the SPY because it shows volume during the day.
The day started normally enough, with the market drifting lower from the open.  At around 12:45, the S&P500 finally hit the support level we discussed yesterday, 839.8.  At that point, the volume exploded to the down side, and we were temporarily in a free-fall.  I believe this happend for two reasons: 
  1. Traders who put stops at or just below the 10/10 intraday low got taken out
  2. Possibly new sellers started shorting on the break below support
In reality, it was probably a combination of the two that took place.  Over the next 15 minutes, though, the selling reversed, and the market moved up 10% to 11% from those lows.  This represents 880 Dow points in the final 3 hours of trading, a truly out of the ordinary event.  We got a very strong move, and a clear close above the support levels we talked about.
A daily chart is revealing as well:
Here we see the bigger picture.  The support at the current lows was tested by the long tail of yesterday's green candle.  We closed above the previous 2 days closes, which is very bullish.  Finally, volume, which came almost entirely from the afternoon session, shows a fair amount of money entering the market on the buy side.  I've mentioned several times in previous posts that there is a lot of money on the sidelines from fund redemptions.  That money appears to be dipping it's toe into the market again.
Going Forward
We are not out of the woods, by any means.  In fact, as I write this at 6AM on 11/14, the S&P futures are down 11 points (>1%).  Nonetheless, the "line in the sand" has been drawn.  The obvious support level was tested, and held, by the bullish close yesterday.  Continue to watch the 839 level on the S&P, for a break below still could cause another leg down.  The chances of that happening near-term are much reduced now, and I believe we should see a healthy, upward-biased market until around 1000 on the S&P (Dow 9500).
Let's remember that we are still in a bear market.  Any strong rallies will likely get sold, eventually.  Until the economic picture clears, and we get some non-gibberish from our government, there is no reason to believe that the jitters are out of this market.  For the near-term, bear market rallies are generally fast and furious, so until we get a break above the recent trading range, let's continue to consider this a trader's market.
Good luck,