On August 6th, we talked about the first signal to take caution when the SPY broke below $170.35 after putting in a new high. For those trading on an intermediate time frame, this was the first spot to make some adjustments.
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The market then got some downside follow-through to retest the upper level support of $168.20 and the 21-day. I mentioned that several sectors, like the banks and the homebuilders, were well below their 21-day moving averages on that day. This was another sign to be more cautious for intermediate traders like me, as I switched back to a short-term tactical approach.
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On August 8th, we mentioned about there were different ways to paint this picture. Some say a “Summer Range”, some say an “Ascending Channel”, some say “Potential Head and Shoulders pattern” in the making. We highlighted those patterns on our chart, as the bears did contain the bounce at $170 area.
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Yesterday we talked about the market was also forming an upper-level wedge pattern, which is a pattern of indecision that takes place after a big move that consolidates price action before new motion.
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Today we opened below the neckline of the Head and Shoulders pattern. The market does feel a bit heavy. The 75% of the measured move of this Head and Shoulders pattern has been met. Next important support is the 50-day at around $165.70 which could be a better buyable spot if we get there.
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Disclosure: Scott Redler is long GLD, SPY puts, IBM puts
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