I SPY The End

Today was a grizzly day for those of us maintaining long positions. I just had to shut down my computer and walk away. While commodities held up, the stock market really took a nose dive. Oddly, treasuries also fell. The dollar did shoot upwards a bit but I think that stop loss orders helped to propel the market lower. I'm still maintaining my position that the market is going to rebound but the odds of a big rally now look remote.

Today's bottom bounced squarely off of a .618 fib, this time drawn from top to bottom less the top spike. This is a pretty satisfying picture since this is my go to method for Fibonacci retracements, and the hammer marks a bottom nicely. RSI looks about right, landing on a trend line. The composite can liberally be read as positive reversal which technically points to a rebound up to 138.03 although I am at this point skeptical that a bounce from a .618 fib could get us that high.

DIA bounced off a .5 fib while QQQ merely retested it's bottom:

The red line that it bounced off of is a Fibonacci that I'd calculated some time ago. Note how the bars are respecting those three red lines. If the market falls further then I'd expect that final red line to catch it. Also worth noting is that QQQ is still above the 50 day moving average. It's just my bad luck that I chose to trade SPY for this period of time rather than QQQ or DIA which are usually the instruments I prefer to trade and have held up much better.

A question we need answered is how does a market respond to a .618 retracement coming out of a correction? One interesting episode occurred at the top of the dot.com bubble in 2000:

While the wave pattern is much more complex than our current top we can still see similar action. A strong rally out of the steep correction from the top then fell to a .618 fib. Surprisingly (to me) the market bounced off that fib and completed the rally with a slightly higher top, essentially a re-test of the extreme top of the market. This would be the equivalent of today's market getting to 136 and then dropping precipitously. This would be a welcome turn of events.

The 1994 correction also had a .618 fib retracement that played out very differently:

Here the retracement came off of a very different type of rally. It indeed fell short and pulled a Crazy Ivan that would have shaken a lot of traders in both directions. It then looked to be heading into a crash, only to bottom out and begin the greatest rally of all time! I don't think this is going on of course as the character of a consolidation is very different from what we're experiencing now. In general, consolidations don't provide many .618 retracements.

1981 gives us another interesting view into a market top:

These waves look familiar the more tops you look at although it's often a mix or match game in regards to the order of the waves. This top looks a lot like the 2000 top but our .618 retracement shows up in a very densely traded wave. It rebounds but does not make a top. It too pulls a Crazy Ivan. See if you can spot it. Plenty of warning in this market top to get out.

Our doppleganger the 1977 top gives us an object lesson in what happens if the .618 is broken:

The green arrow marks a big stop day much like today's action. The next day the market dips below the .618. For several days the market holds the close above that level but eventually capitulates at the red arrow. One would have been lucky to bale out with one of the spikes between the green and red arrows. The market then goes into a "trading market" but once again the market is generous, providing a third and final opportunity to get out at the .618 level at the purple arrow. It's all over after that.

To summarize I'd say that 136 is not completely out of the question. The market has worked off a lot of that rally and the bulls may be ready to push on. The commodities in general look like they still have a solid wave left in them. We will have to keep our eyes on the individual stocks and various markets to attempt to divine a turning point.