It was anything but fun to be on the receiving end of Thursday’s big market crash. Still, you have to concede it was an amazing thing to watch. It was the worst day the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had suffered since May, with the SPY ETF losing 1.4% of its value. In fact, the move did a little technical damage to the bigger-picture uptrend that should give all investors pause.
And yet, as overdue as the S&P 500 (and all other stocks) are for a pullback and as overvalued as the market may be, the rally still isn’t beyond salvaging.
It’s going to need a lot of help very soon though.
The media’s cited reason for Thursday’s steep selloff was heightened tensions between North Korea and the United States, which look like overtures to war. In most regards, that worry was the catalyst for the pullback.
It’s a bit of a leap to call it the outright cause, though. The truth is the selloff may have happened anyway — traders just needed an excuse to open the proverbial pressure valve. It has happened before, and it will happen again.
The other reality of yesterday’s market crash: We’ve seen it before, recently. And the market not only stopped the bleeding rather quickly, but managed to reach new highs just a few days later. A repeat of that pattern is still very much on the table.
The chart of SPY suggests it would be unusual if that didn’t happen this time around.
Take a look at the daily chart of the SPY ETF going all the way back to the low from Dec. 30. Though not with absolute perfection, with near-perfection the ETF has found support at a well-defined rising floor (blue). That floor just so happens to be where Thursday’s selling stopped. Although only time will tell if that line holds up as support, the early indications are that traders are using it as a bullish pushoff point.
That’s not the only key clue that this breakdown isn’t necessarily the beginning of gloom and doom.
Short version of a long lesson: The VIX, or the S&P 500 Volatility Index, is a fear gauge as much as it is a measure of predicted near-term volatility. As a fear gauge, though, it’s also a contrarian indicator … meaning when it’s supposed to be the most bearish, it’s actually a bullish sign, and when it’s supposed to be most bullish, it’s actually a bearish clue.