Another down week and we got pretty close to the elusive 10% correction. QE rumor saved the bulls from further damage, but the IWM looks to run out of gas toward the close Friday. Seasonality will again be poor next week and at best the market may put in a choppy range and at worst a possible lower low. Everyone will be watching the recently broken 200 moving average around SPX 1900 and above that 1920. Those are formidable resistance and will likely take more than one try to close above.
With the August low broken and SPY loosing the 200 day, the bears finally took control this week. The large rally was soundly rejected the next day. Huge break down in SMH, IWM hitting new low, QE winding down, Europe sinking, and Ebola outbreak created the perfect storm. Barring any oversold bounces, the bears may finally get the 10% correction before a possible year end rally.
Next 2 week’s up and down will most likely dictate the trend going into end of the year. Bulls stepped up after a retest of the August low with some sentiment indicators hitting extreme. S&P will be testing the break down zone next week and also IWM is forming a possible huge head and shoulders top. Some negative news coming out of Europe is so far trumped by merger and restructuring news. A choppy retest of the recent low as we gradually transition out of the weak early October seasonality with strong earnings should help into 4th quarter.
While the GDP shows the economy is still humming, there was strong appetite for puts as major indices broke down from major support. Volatility also returned in a big way as alternating days of up and down is keeping bulls and bears on their toes. Arguments can still be made for both sides and the bearish case always seem attractive after such a long run. However we still have the give the bulls the benefit of the doubt as we move into end of quarter and nonfarm payroll next week.
With the break down in IWM, reversal in SPY and the BABA initial public offering, social media is again filled with bearish scenarios. Seasonality dims considerably going into next 2 weeks and there was a pickup in IWM put buying. However with the bearish sentiment pickup, a sideways consolidation or a probe lower and reverse could also be in play.
Rate worries put a lid on any rallies this week. China deciding not to lower rates and election rumors have the futures below Friday’s low. Next week favors either continued chop with the downside likely targeting around the 50-day moving average at 1971 or more upside. Furthermore, based on the V-shaped bottoms since 2012, the risk/reward favors that we do make another new high above 2011.17 especially with financials leading. FOMC is on tap next week and option expiration should bring extra fireworks.