In yesterday’s article, I laid out the case for the market forming a top. This case continues to strengthen the longer the market hangs around at this level. Calling tops or bottoms is essentially the most difficult aspect of technical analysis, and it’s always easier to be wrong than right — because you’re trying to anticipate a completely new direction in price movement, based only on circumstantial evidence. So, despite the prevalence of indicators, I could always be wrong. Please manage your trades accordingly.
Listed below are some new and continued indications of a top.
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The Volatility Index has now traded outside its lower Bollinger band for the fourth straight day. This is a pretty rare signal, and has only happened nine other times since 2004. In 6 of those 9 times (67%), this led to prices falling below the price at which the signal occurred — however, sometimes after one or two days of the market trading higher than the signal price. In 1 of those 9 times, this signal marked a major peak: in May of 2008, when the S&P 500 was trading at 1440. The market ultimately went on to decline all the way down to 666; and this peak has still not been bested since.
The market also formed its third reversal candlestick in a row. This time, a black reversal bar — which is formed when the market closes below the open, but the close remains above the prior close. This is the third day in a row that the market has seen an intraday reversal lower; usually, this is a bearish signal.
It seems like the main thing holding this market up right now are the overnight futures. In fact, of the 108 points the SPX rallied off the 1158 low, from the standpoint of price advancement, approximately only 20 of those points have come from the cash market. Even as I write this, the futures are trying to reverse Monday’s selling. I’m dubbing this “The Buyerless Rally.”
Anyway, in the daily chart below, I’ve highlighted every occurrence of a black reversal candlestick going back to April, and you can see that Monday’s candlestick is almost always found in the vicinity of market reversals:
The next chart is the preferred count, which was updated first thing on Monday’s open at my website. The market followed the projected path perfectly for an expanding ending diagonal.
Now, the challenge remains that this rally could still be labeled impulsively. I believe it counts better as an ending diagonal, as shown above — but it’s not a clear-cut 100% “oh yeah, that’s it fer sure.” Below is the bullish labeling, and for the moment, the haziness remains between counts.
Both counts are expecting downside in the very near future, and the preliminary target for either count is the 1225 area.
Any new highs above Monday’s would further favor the bullish alternate count shown above.
Apologies are in order for not completing the NDX chart, which one reader was very insistent on seeing over and over and over. I’ll try to get to it tomorrow. 😉
In conclusion: it remains a trader’s market, as so far every break of important support or resistance has led nowhere. I continue to favor the bearish short term resolution, as well as the bearish long and medium term views. Hopefully, we’ll gain more clarity on the short term picture soon — three days of the market doing essentially nothing hasn’t helped much, though I do feel the bearish ending diagonal count is quite viable and somewhat superior to the more bullish impulsive labeling. Trade safe.