Sometimes the market will stop at certain levels because players who believe in those levels will sell the market as their specific indicators suggest a sell point. For example, moving averages are pretty much just lines drawn in the sand. They simply represent a rolling average price, and thus can indicate a trend – or a lack of trend. But players will sell a market (program trading does this automatically) simply because the moving average was cracked. Thus, the break of a moving average puts pressure on the market, and this creates a self-fulfilling prophesy.
Currently, the S&P 500 is toying with its 50 day SMA. In itself, that doesn’t mean much. However, the fact that may traders, and computerized trading programs, will recognize the 50 day SMA as a potential breaking point may influence the market to continue to pause. A break through the 50 day (it actually broke through on Friday, but I consider a break as 3 full days over the average) means that those “selling traders” are of less influence than the “buying traders”. Today and the next day or two will be telling of that potential.
Another self-fulfilling prophesy on the charts can be Fibonacci retracement targets. As you probably know, I place absolutely no faith in their value, except in the fact that some traders and program trading applications might utilize them as sell targets. Here is a blog on my thoughts regarding Fib. Targets.
Currently, the S&P is toying with the 61.8% retracement point when measured from the recent peak, and subsequent trough of the recent correction. The above chart shows us both the 50 day SMA and the Fib retracements. Despite my hesitation to place any significance on these Fib. targets, it is a fact that some people do treat them with a an almost religious faith. As such, there may be cause for pause if the traders that do follow Fib numbers believe the current 61.8% retracement is significant. They will sell because the magic 61.8% number was hit.
All in, the next day or two will be telling as to who wins – the retail buying crowd who don’t know or care about such things as moving averages and Fibonacci targets – and those traders and computer programs who do. At the end of the day, the bulls will likely win, but there is cause for some potential sideways action or pullback. We’ll see how that plays out before the end of this week.