Retest or Retreat?

Last week ended with most major market indexes making new all-time highs. Everyone was excited and all bulled up. The range break had finally happened. The summer was over and it was time for the markets to march higher again. The all clear signal had been sounded.

Then Monday came. Not so bad, but hardly a follow on day. There was not a frenzy to get into the market. And Tuesday pushed lower. Wednesday and Thursday followed to the downside. What happened to that break out? Where was all the smart money from the sidelines that was going to pile in?

The chart above puts this in perspective for the S&P 500 ETF, $SPY. A pullback, yes. A top? Well it is a bit early to call that. First, the pullback has only just closed the gap from 2 weeks ago. It is just coming back to retest the prior high as support. This often happens after a break out and before the big move higher. And the ETF is just back to its 20 day SMA.

So one interpretation would be that the break out two weeks ago resulted in the SPY being extended from the 20 day SMA, and this is just a healthy reset. Of course a continuation lower negates that case. And a move below the August 15th low turns things bearish.

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