A Mean Reversion to the Mean
After a record sideways move, we got a vicious reversion to the mean.
Following a record period without a 1% move, 4 out of the last five sessions have seen greater than 1% moves.
Volatility precedes price and since this bout of volatility occurred right off all-time highs, the presumption is the price action is signaling a turn down.
Obviously, we're getting a change in fundamentals every 24 hours, right?
Clearly, cycles are exerting their influence, suggesting the resolution is to the downside
Despite Mr. Market's manic depression, the SPX stopped precisely at the June 6 pre-Brexit pivot high at 2020.
The outbreak of volatility started 90 degrees later on September 9.
Yesterday the SPX closed at 2147, which ties to 90 degrees down.
So despite the extreme price contraction and the extreme price expansion, you can see this 90 degree time and price rhythm underlying market behavior.
The 3 Day Chart has been flipping up and down as well.
The 3 Day Chart on the SPX set a low on September 1 and turned back up on as soon as it could have on September 7 defining an immediate pivot high, which preceded last Friday's plunge. Last Friday's drop turned the 3 Day Chart back down again — not because there were three consecutive lower daily lows, but because the move violated the prior September 1 ‘circled' low.
Yesterday, the Daily Swing Chart turned up for the first time since the test of 2120. Trade above Thursday's high today will put the SPX in the Minus One/Plus Two Sell position.
That said, with the alternating large swings dominating the tape, and today's emotional eclipse option expiration, it wouldn't be surprising to see another trip to the downside.
If that starts, will players buy another dip ahead of the weekend?
Of course the market has to have a rationale for its behavior and the excuse for the market's hissy fit is a ramp up in Fed speculation.
Maybe the algo's couldn't take being in hibernation all summer.
Maybe the big players told the JV Team not to do anything while they were on vacation.
Clearly, once Labor Day came and went, it was as if a grenade was lobbed on to the tape.
But the real culprit looks like the breakdown in bonds.
See chart of TBT here again from yesterday's report.
Conclusion.
An hourly SPY shows Thursday's rally off triple bottoms at 2100. Once it began, SPY magnetized to the 215 strike. This coincided with a backtest of the 50 period into gapfill.
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The SPY is setup for a pullback.
AAPL and the AAPL dumplings (semi suppliers) have been the driver with AAPL exploding to the 115 strike after knifing through the 110 strike The push through 110 coincided with a turn up in the Monthly Swing Chart. The ensuing extension was a signal higher.
Now the SPX is flirting with its Monthly Swing Pivot at 2147.58. This is where the index turned its monthlies down in September.
On Thursday, the index closed right on this pivot. Continuation above this level, especially on the Friday weekly closing basis, should be constructive near-term.
That said, the tremendous instability when it follows declining internals typically ends badly. It is dangerous — fostering a new kind of complacency that this is the norm and that buying the dip is always rewarding.
The thing is, buying the dip is occurring over shorter and shorter intervals as the strategy is taken to heart.
Strategy.
If the SPX closes meaningfully above 2148 today, discipline requires one to reduce bearish exposure.
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