Stock Market Update (Aug 6): Don’t Let The SPY Surprise You

Michele Schneider

Today’s commentary is written by Geoff Bysshe, President, MarketGauge. Geoff is filling in for Mish until August 20th.

On the surface, today’s move in the S&P 500 (NYSEARCA: SPY) was not all that notable. The SPY was up 0.4%, and its range was half that of its average volatility.

It was, however, the third day of a powerful pattern.

Last Thursday the SPY opened below a significant swing low which many traders could have seen as the beginning of a breakdown had it stayed there for more than a fleeting few minutes.

Since that gap lower, the S&P 500 has marched higher without any meaningful pause or even a pullback. Today it confidently marched through its recent swing highs.

Further highlighting the bull’s control over the SPY, is the fact that the VXX sunk decisively below a floor of support that has held for weeks.

Additionally, the breadth of the market as measured by the action in the sectors was very healthy with 7 of the 14 major sector ETF posting gains of roughly 0.5%. Of the 3 sectors that were down, the worst was -0.1%, so essentially every sector was up or flat on the day.

This multi-day pattern of taking out a swing low and then proceeding to march relentlessly to a new swing high is quite bullish.

Most bull trends need to rest to continue, so I don’t expect this to continue indefinitely, but it has the potentialto surprise to the upside because…

What has happened in the Nasdaq (QQQ), Russell 2000 (IWM), and Dow (DIA) has been a very different story. These other indexes have had more of an ebb and flow.

In the case of IWM, it’s been consolidating. Perfect.

The more mundane action in these other three indexes suggests that the SPY’s bullish action is not to be confused with euphoric action. Euphoria is fun while it lasts, but it kills bull markets. We don’t want that.

The SPY now sits at a big inflection point, and it has the energy of a market that could surprise traders to the upside.

It would be easy to look at the QQQ and IWM and say they are diverging negatively, and therefore the SPY is likely to fail at this high, but if that’s the case you can see the beginning of such a failurevery quickly.

If the SPY trades under its prior day low and underits 30-minuteopening range, then it’s time for the SPY to rest and be cautious.

However, if the SPY accelerates higher, don’t be surprised.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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