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The S&P 500, Apple Earnings, and Feeding the Market Monster


A look at the charts to determine whether we are facing a bullish or bearish scenario going foward.

The last hour of trading was intense on Tuesday and then all eyes were focused on Apple's (AAPL) earnings, which were released around 4:30 p.m. ET. The initial reaction to the earnings release was negative, although while writing this yesterday, AAPL was bouncing sharply higher in after-market trading on strong volume.

To put the final hour's volatility into perspective, at 3:00 p.m. ET the S&P 500 Index was trading at 1,217. A mere 12 minutes later the S&P 500 Index pushed 15 handles higher to trade up to 1,232. Then sellers stepped in and pushed the S&P 500 lower by nearly 12 handles in the following 20 minutes.

The price action was like a roller coaster, and I was watching the flickering red and green bars in real time with anticipation. It was the most excitement I have had in quite some time, but please don't hold that against me. I don't know whether reading my previous line makes me laugh or cry, but the truth must be heard I suppose.

Enough self-deprecation, I want to get down to business with some charts and what is likely to happen in coming sessions. The sell-the-news event in AAPL has the potential to really change the price action today. If prices hold at lower levels, the indices could roll over sharply today. The S&P 500 E-Mini futures contracts are showing signs of significant weakness after the earnings miss by Apple in aftermarket trading.

Some other potentially game-changing news items came out of Europe where Reuters reported yesteday that the eurozone will likely pass legislation that will ban naked CDS ownership on sovereign debt instruments. Additionally, Treasury Secretary Timothy Geithner stated yesterday morning that a forthcoming FHA announcement involving a new housing refinance plan was going to be made public in coming days. The statement regarding the new FHA plan helped the banks and homebuilders show relative strength during intraday trading and likely were behind much of the intraday rally.

I would point out that the S&P 500 Index (SPX) broke out slightly above the August 31 highs before rolling over. The reason that is critical is because the S&P 500 E-Mini futures did not achieve a breakout, but tested to the penny the August 31 highs. I am going to be totally focused on today's close as I believe it will leave behind clues about the future price action in the S&P 500 leading up to option expiration where volatility is generally exacerbated. The daily chart of the S&P 500 Index is shown below:

If Wednesday's close is below the recent highs near 1,230 we could see this correction intensify. The price action on Tuesday helped stop out the bears, and if we see a significant reversal today, the intraday rally yesterday will have been nothing more than a bull trap. The price action Tuesday and Wednesday could lead to the perfect storm for market participants where bears were stopped out and bulls are trapped on the potential reversal.

Another interesting pattern worth discussing is the head and shoulders pattern seen on the SPY hourly chart. The strong rally to the upside may have indeed negated the pattern, but if prices don't follow through to the upside in the near term and the neckline of this pattern is broken to the downside, we could see serious downside follow through. The hourly chart of the Spider SPY Trading ETF is shown below:

Ultimately there are two probable scenarios which have different implications going forward. The short-term bullish scenario would likely see prices break out over recent highs and push higher toward the key resistance area around the 1,260 price level. The 1,260 price level corresponds with the neckline that was broken back in August that led to heavy selling pressure.
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No positions in stocks mentioned.
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