The SPYs finally closed below 88.50.  This is the lowest close since the gap day on May 4th.  Many people are talking about how the daily chart for the SPYs look like a head and shoulders with a neckline at 88.  There will be many obsessively on tv talking about how “technically” we look like we are going to trade lower.  A few things to consider:

1) Just because it looks like we will trade lower doesn’t mean it is so.  You need to go through your charts and see which stocks have been acting the weakest and which have been the strongest.  A quick scan of some of the stocks I have traded during the past two months indicates that they are at much higher levels than they were on May 3rd.  If the market begins to crack they have a lot of downside.

2) Last time the SPYs were at this level financials and technology stocks were at much lower prices.  It appears the energy sector has done most of the heavy lifting on bringing us to this level.  The short energy trade may have already played out.

3) The volume has been minuscule as of late.  It seems like most are waiting for earnings season to begin before putting money to work.  Next week is going to set the table for the next few months.  The key is to watch how stocks act after reporting.  If the majority of the reports look good but we don’t work our way back up to 93-95 on the SPYs then we are probably in store for another 6-8 points of downside.

4) I didn’t really see stocks breaking down at the end of the day as the SPYs were cracking.  This makes me somewhat skeptical of the weak close.  I managed to make some money short V but it really wasn’t that weak.

5) Don’t fight the tape.  If we gap below 88 tomorrow and make a feeble attempt at a bounce then your energy should be focused on the short side.  If we trade above 88.70 on the Open and hold higher then look for move to 89.50-90 on the SPYs.

As traders our job is to let the price action determine our positions.  I take a look at the bigger picture each day so that I am mentally prepared to best exploit the price action that I see developing on my screen.  When the price action confirms my trading ideas I am all in.  If the price action is counter to my trading plan then I get out and reevaluate.  That is the mindset I will bring to the market tomorrow.

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