The Market is Very Vulnerable Here

Posted on Sunday November 15, 2015

The price action is suggesting the market is extreamly vulnerable here on the larger time frames (weekly/monthly) So I wanted to take the time to review the things I am watching on the technical level. The larger time frame are important to longer term investors and I believe it is very relevant here.

Beyond bad breadth, and bearish divergences, price has begun confirming a bearish thesis.

Here is what I was watching last week.

Last weeks revesal was about as clean and obvious as they come and giving us signs are that we are putting in a major market top.

Beyond bad breadth, and bearish divergences, price has begun confirming a bearish thesis.

Here is what I was watching last week.

Last weeks reversal was about as clean and obvious as they come and giving us signs are that we are putting in a major market top. The technical deterioration across the board was pretty bad as many stocks either failed breakouts or just completely broke down.

I am going to start with the shorter time frame because it helps explain where the reversal started, as it is not visible on the daily time frame.

On the 30 minute time frame we can see two H&S tops . The first one acquired its’s downside target rather quickly and formed a 2nd, with a 2019.98 target. I fully expect that target to be acquired quickly.


BEARISH WEDGE BREAK
The 2nd thing the market did last week, was break the bearish wedge created by the recent rally. The target of a bearish wedge  break like this is the wedge low 1878, with the last line of defense for the bulls at the 61.8 fib extension at about 1968. 

So where does that leave us in the Big Picture?
In a pretty risky place. Why because completing the bearish wedge pattern and revisiting the 1878 really gives us a major market topping pattern. And the target for that is 1600.

Wow 1600? 
Yes 1600. Let’s back out a bit on the chart and put it all in context. To do so, I am going to use Fibonacci levels. Fibonacci’s work well as places support may come in (if you don’t believe me, email me and I will send you as many good examples as you want) the challenge with them sometimes is just choosing the correct swing low to use. So let’s look at both.
Let’s start with the 2009 bottom and draw to the 2015 top. If we were to retrace to just the 38.2 Fib that level is right inside of 1600. Additionally this would line up with a retest of the 2008 highs. So really, not out of the question.

Prefer to use the 2011 correction as the swing to draw the fibs. Ok here you go. As you can see, the 50% retrace also lines up with the 2008 highs and 1600.

The other indexes
 
Look about the same. Here they are with the price targets.

LONG TERM INVESTORS

On the longer term time frame the Monthly, I use the 12 Month Moving Avg as a guide. Please notice how the last two major market tops were put in with failure and retest of the 12 month moving avg. We are currently doing that again.

10/20 Month Moving Average

Another signal I picked up recently from Louise Yamada  (http://www.lyadvisors.com/)
Is the 10 and 20 month Moving avg cross over. Here it is below. Although it has not crossed yet, I am seeing the signs right now that this is a very distinct possibility. So for long term investors, keep an eye on it.

If you want to see a 10/20 crossover, we can see it has already occurred on the NYSE composite. Based on the narrowness of the last rally, it does not surprise me that this was the first one to cross over. Will it be the only? Time will tell.

What else am I seeing?

Well I think China could come back on the Radar. Why?

  1. 61.8 Retrace resistance.
  2. Overhead Supply right here
  3. Bearish Flag

Risk Off Trade is trying to put in an inverse H&S bottom.

Emerging Markets breaking bearish flag after retesting overhead supply.

Retail stocks 

Putting in a H&S top looks like more downside possible.

SUMMARY
The bottom line is I believe the market is in its most vulnerable state in years based on the current technicals. We have not confirmed anything as of yet but a move below 1920 and then 1968 would really shake things up. The early signs are here that that may not happen.

Nobody can predict the future, all we can do keep a serious eye on the price action and align ourselves accordingly. I hope this will help you put things in context.

Good Luck.

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