The poker game continues as markets finished the week right back in range. Bulls got a magic save on Friday following bad news as both NFP and factory orders came in far below expectations. None of these misses were predicted by either economists or the Fed. Confidence inspiring? Not so much. Yet is bad news good news again? QE4 coming? The fact is bears couldn’t keep price below 1900 $SPX (a key level we had discussed in Technical Charts) and once the level held again it was panic buying on strong volume.

So we’re back in range and both bulls and bears still have to prove their cases. Traders love this environment as it provides plenty of opportunity for outsized gains, but the risks to charts are mounting and frankly markets are hanging by a thread and need a major technical rescue soon.

Let’s walk through some key charts:

Daily $SPX: Back in range, potential for a double bottom, MACD cross, but declining MAs with major resistance ahead:

The 50MA is declining steeply and is currently sitting at 2002 and at the top of the daily Bollinger band. Ironically this level represents major confluence with the monthly 20MA. We have been watching the monthly chart and it alone is the chart that should scare the living daylights out of every bull as it has now crossed its key MAs. The historical record is clear:

The message of this chart remains: Unless $SPX breaks above the monthly 20 MA price may move lower. A lot lower.

And it’s not only the monthly $SPX that illustrates how thin this thread is. Look at all these monthly charts:

The message is uniform: They are all barely hanging above key support levels a break of which will invite significant more downside.

More concerning for bulls: Friday’s rally occurred despite a further breakdown in $HYG:

This divergence is especially notable given the larger context:

So someone is lying it seems and next week will likely shed more light on the truth here.

What do bulls have going for them?

Well, for one, the house clearing has been awe inspiring as outlined by the record shift in the Ryder bull/bear asset ratio and hence the boat may lean too far the other way and this alone may help explain the rally on Friday:

And of course rallies in October can be formidable, especially if lows come early. Some examples from recent years:

2003:

2006:

2010:

2011:

Notice a pattern? Now none of these examples are guarantors that this October will play the same way and plenty of sell off examples for October exist, but it shows a structural history that suggests at least the possibility of a major rally. And who can forget the big rally in October 2014 following the almost 10% correction then?

As the Ryder chart above shows lots of folks have dumped stocks, not only the Saudis. Hence performance anxiety going into year end may be the next big thing and this may create a FOMO chase. While Wall Street has cut its year end targets these targets are still a lot higher than here. So a lot of people have a lot to prove. Earnings are beginning next week and may shed a light on how justified the deep cuts in earnings expectations have been. But remember: It’s the reaction that matters.

So bottom line: What we said last week is still very much true with now some additional qualifications:

Bears:  You now need to break $SPX 1900 & the neckline and STAY broken below October 2014 lows (that’s about 130 handles lower from here).

Bulls: You absolutely need an October magic show and get back above the daily 200MA (currently 2063) and the monthly 20MA (currently 2003) or the jig is up for a long time to come.

Got a trade plan? 🙂