SPX Update: Gaps Usually Get Filled

Yesterday, the market spent the majority of the session in consolidation mode, and formed a wave structure which looks corrective — indicating that it’s reasonably likely there are at least slightly higher prices to come before this wave completes.  The structure is vague enough that higher prices aren’t guaranteed, though, and the rally has already completed the requirements of the larger waveforms.  My stance is that the reversal could begin at any time. 

The S&P 500 has overhead resistance in the 1300-1310 zone, and the market is now approaching this zone in an overbought condition, which severly weakens its chances of breaking though.  I would be quite surprised if the SPX can break through this zone for more than a head-fake, if at all.

Something my readers and I have discussed at length is the current market sentiment, which is now well-above historic levels for bullishness, and well-below historic levels for bearishness.  While this indicates that many traders have already committed to positions (i.e.- there are more holding long positions than short postions and thus fewer buyers),  the question has come up as to what might shift sentiment to bearish and increase selling pressure?  One thought as to what might accomplish this is that the United States is once again bonking its head on the debt ceiling.  It remains to be seen how this will be handled politically during an election year, but if it turns into another drawn-out gunslinging contest, the market could react in a similar fashion as it did last August.  Not that anything like that could ever happen… I’m sure we can rely on our elected officials to handle this issue peacefully, and in good taste (excuse me for a moment while I fall out of my chair laughing).

In any case, the charts continue to suggest that the market is forming a top in this zone.  The first chart I’d like to share is the one-minute SPX chart.  I’ve simplified this chart because there are now a number of viable ways to count the current wave structure, but they all seem to end in roughly the same place: somewhere between here and 1310.

The next chart outlines some support and resistance zones which are below and above the current market.  The trendlines run back a long time in some cases, but in order to make it readable, I had to zoom in on the current price action — so the beginning of some of the lines isn’t shown.

The last chart shows some of the unfilled gaps which are beneath the current market, which is a result of the fact that so much of the rally has occured in the overnight futures market.  The vast majority of the time (nearly 90%), gaps of this type are filled within 100 days of when they occur.  Obviously, there’s never any guarantees, but this seems to be one more suggestion that the market will soon retrace this rally.

My expectation remains that the next move after the market finally turns will be a break of the October lows. For the longer-term charts, please see yesterday’s article.  Beyond that, there simply isn’t much more to add to the last few updates.  I’m starting to feel a lot like I did at the December top when I spent nearly a week suggesting that a turn was imminent, and I was even starting to repeat myself (repeat myself).  Unlike bottoms, tops take time.  To sum it up, here are some issues which support the bull and the bear cases:

In support of the bull case: 

1) The market is still in an uptrend
2) There were several resistance areas broken over the past couple weeks.

In support of the bear case:

1)  The market is overbought, and approaching resistance.
2)  The wave structure supports a top.
3)  Sentiment is exceptionally out-of-whack to the bullish side.
4)  The market has numerous unfilled gaps below.
5)  Several indicators which were triggered over the past few weeks suggest the market needs to return to lower levels.
6)  The put/call ratio is reaching extremes where tops normally form.  Conversely, the OEX put/call numbers suggest that smart money is placing bearish bets.  Unlike equity put traders, OEX put traders are right more often than they’re wrong.

While my style is to try to anticipate the market by shorting near resistance and buying near support, I am also quick to exit if a trade goes against me.  My expectation is that a top is forming, but more conservative traders may want to wait for some type of actual confirmation of a trend change, such as a break of the lower short-term trendline, or a break of the trendline which connects the November lows and the December lows.  Trade safe.