A look behind Monday’s wild ride

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“Lows are never made on Friday.” That old trader’s rule of thumb seems truer than ever now.

The basic idea is that when a week ends on a bearish note, some investors will capitulate over the weekend by submitting sell orders. Those inevitably trigger more selling Monday. Disciplined momentum watchers also wait for signs of stability before putting money to work.

The pattern played out in a big way yesterday, with the S&P 500 sliding as much as 2 percent at its worst. That would have been the index’s biggest decline since April 6 if it had held. But it stabilized in the final hour to close down 1.4 percent.

All that movement sent traders flocking to the derivatives market. TradeStation’s analytics showed total options volume spiked to 24.3 million contracts, the busiest session in over three months.

Cboe’s Volatility Index ($VIX.X) shot up as well. At its high, the fear gauge was up 42 percent on the day. If the move had held, that would have been VIX’s biggest gain since February 5’s huge spike. But it also eased considerably in the final hours of trading.

So where do we stand, now that it’s all said and done? Here are what some bulls and bears might say.

Of the bat, the bears seem to have one major argument: The S&P 500 failed to break resistance at the March high around 2800. If it remains range-bound, that could make them expect a test all the way back down to the bottom of the range closer to 2600.

However the bulls may have more ammunition, especially with the economy continuing to chug along. Some positive things have also been taking shape on the charts.

The S&P 500’s moving averages, for instance, are now lining up in a way that’s more consistent with an uptrend. Its 50-day moving average last week crossed above its 100-day moving average for the first time since the selloff earlier this year. The index also managed to close above both yesterday — more potential positives for the bulls.

A trend line running beneath the S&P 500 for the last two years remained intact as well, which may keep chart watchers focused on Monday’s low of 2699. Much below that level could be viewed as break of that trend.

S&P 500. Notice how shorter-term moving averages are above longer-term MAs.

Another question now is whether yesterday’s drop was like May 29 — another Monday. That selloff resulted from weekend worries about Italy that quickly faded. This week’s involved a press report about the White House blocking Chinese investments in U.S. technology companies. But then after the close, economic adviser Peter Navarro denied the gist of the story. That could mean a lot because Navarro has been the harshest critic of Beijing’s trade practices.

So in conclusion, we have another pullback in an upward-trending market. Anxieties have subsided quickly, failing to mushroom into full-blown panics. We’re also in the midst of a third straight winning month as summer holidays approach. Could the market drift higher into the end of the quarter?

This isn’t a trade recommendation and everyone needs to do their own homework, but investors may feel comfortable standing pat as long as the index holds its 50-day moving average. Much below that level, it could be a very different story.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.