SPY consolidates within downtrend

I also think that short-term sentiment is quite bearish as we head into September. Excessively bearish sentiment can foreshadow an intermediate bottom. The AAII bull-bear ratio is approaching its July low as sentiment become excessively bearish. Even though September is historically the worst month for stocks, the fourth quarter is the best quarter, by far. We also have Labor Day on Monday. There is a slight bullish bias heading into this holiday and into early September. Seasonal patterns turn bearish in mid-late September.

With five days of indecision around 105-107, there is no change in the daily chart analysis. It is still possible that SPY is in the early stages of forming the right shoulder of an inverse head-and-shoulders pattern. "Early" remains the key word here. A falling channel has taken shape the last 3-4 weeks with a sharp decline. With Monday's decline, SPY affirmed first resistance at 107.10. It would take a convincing break above this level to argue for a reaction low and the formation of the right shoulder. Until such a break, the trend remains down and lower prices are expected to there is evidence to the contrary.



The 60-minute chart focuses on the falling channel and resistance at 107.10. Resistance here is confirmed by the mid August trendline, broken support and last week's gap. The 50-60 zone in RSI also marks momentum resistance in a downtrend. These resistance levels held with Monday's decline. I can now lower key short-term resistance to 107.10. A breakout in SPY and an RSI break above 60 would reverse this short-term downtrend.



It is one full week on the economic reporting front. Wednesday features the ISM Manufacturing Index. Consensus is 53 and anything less would be negative. The market could be hit hard if either or both fall below 50, which would favor economic contraction. I do not expect that though. The European Central Bank makes its interest rate decision and policy statement on Thursday, which will affect the Euro. Friday is the big day with ISM Services (consensus 53) and non-farm payrolls (consensus -80,000). We can basically watch the trend for these reports as the week unfolds. Better-than-expected numbers could buoy the bulls, but worse-than-expected numbers would likely bring out the sellers as chances of a double dip increase.

Key Economic Reports:
                                       
Wed - Sep 01 - 08:15 - ADP Employment Report
Wed - Sep 01 - 10:00 - Construction Spending        
Wed - Sep 01 - 10:00 - ISM Index    
Wed - Sep 01 - 10:30 - Oil Inventories        
Wed - Sep 01 - 14:00 - Auto-Truck Sales
Thu - Sep 02 - 07:45 - European Central Bank Policy Statement   
Thu - Sep 02 - 08:30 - Initial Claims        
Thu - Sep 02 - 10:00 - Factory Orders   
Thu - Sep 02 - 10:00 - Pending Home Sales        
Fri - Sep 03 - 08:30 - Employment Report   
Fri - Sep 03 - 10:00 - ISM Services    

Charts of Interest: Tuesday and Thursday

This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.