I thought this was supposed to be a week of low volume and no movement.  We got the low volume part, but someone forgot to turn off the selling algos before they left for an early vacation.  

Before I get into some trade ideas and we look at placing spread trades on trending stocks, let’s look at a bearish case for the market and a bullish case by viewing a couple of charts.

Here’s the bearish case…The mid-June collapse happened over 6 days and the SPY dropped 12%.  The 5-period RSI dropped below 30.  Now, look to the right and you see that the 5-period RSI dropped below 30 again on Friday.  If we see another 12% drop, the SPY would fall to $370, and wouldn’t you know, $370 is a line of support (shown by the red horizontal bar)!  That’s another 6% drop from where we closed on Wednesday and entirely possible at the rate we’re going.  This would be a higher finish than the June low, but it would be close.

What about a bullish case?  Ok, maybe not a bullish case, but what about an indication we may be in an oversold condition?  If $370 is a line of support, we can break out our Fibonacci Retracement tool and draw lines from $370 to the high around $431.  The 61.8% retracement is around $393 and we’re not there yet.  A break below the 61.8% retracement would be a trend reversal.  

If you look at the last drop in mid-June, the RSI and Stochastic indicators were near overbought territory.  The drop that started on Friday started with the RSI and Stochastics already at oversold levels, meaning those two technical indicators were already at the low end of the range before the selling started.  Oversold doesn’t mean the selling move is over, but we could see a reprieve from the selling around the $393 level, which also happens to be a line of support going back to mid-July.