Saturday May 21, 2016
All of the charts below are provided as information only and do not constitute a trade recommendation nor investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise
This weeks S&P 500 Price Action
- Markets hold their ground into Options Expiration.
- Most indexes with the exception of the DJIA, remain in clear downtrends, just above major support.
Failed breakdowns can cause epic short squeezes. We need only look back to February when bears failed to hold us below the January lows and the bulls never looked back. That being said, after breaking the H&S top pattern on Thursday only to begin a bear trap rally, I am personally not sold yet on the idea that things have changed all that much. Instead of over thinking this, let’s just have a look at the price action.
Particularly when the markets get this choppy, it is a very good idea to make sure you constantly have the big picture in mind. So while we can get all excited about a failed breakdown, the truth of the matter is on a swing basis since 4/20/2016 the market is and has been in a down trend. Not just the S&P, but the Russell, the NASDAQ and the DJIA as well. So before we get too excited we must recognize that at the moment, Thursday afternoon into Friday is still only a counter trend rally.
The pattern (shown below) in this down trend has been to make a move lower and then rally to the 61.8 or the 76.8 fib retrace and roll over.
Friday the market failed to get to the 61.8 and paused at the 50% retrace where the market makers basically pinned the S&P at 205 max pain with a close at 205.50. To me this bounce reeks of OPEX shenanigans. Can the market see some upside Monday into 2062 (61.8 fib) 2071 (76.8 fib) sure, but the Bulls still have a ton of work cut out for them for us to start calling this a bottom yet.
So this leaves us pretty much where we were last week. A topping pattern in place but with one caveat. A potential failed breakdown that sometimes can drag the market higher in the near term. Will it happen, I don’t know, lets extend the review across the major indexes to try to gain an edge.
THE S&P 500 –
One of the things that has caught my eye of late is this series of what are supposed to be bullish wedge patterns or bull flags. Well during the last two swing tops, we have seen this pattern break to the downside. Before all of the all time high callers come out of the woodwork, they might want to break this very distinct trend or repeat pattern that is yet to break to the upside.
On the weekly picture, sure we can call this a large trading range, but we haven’t seen the top of the range once. We have only been “NEAR” the top. When you get near a top, that is a lower high. And lower highs and lower lows are a downtrend. So by definition, not only are we seeing the bull flags break lower, they have been breaking lower in a down trend.
The Russell – On the shorter term view,
- we got a nice rally to just back above the neckline. It’s closed right at it’s 61.8 fib from this latest down move.
- It is still Lower highs and lower lows.
- Watch for evidence of a higher low above Thursday’s lows if the trend is going to change.
- Like the S&P and the Russell, downtrend by all accounts.
- This one failed to regain it’s neckline. Nice bounce Thursday into Friday, but this topping has triggered and remains the play until we see a higher low and higher high that occurs or takes us above the neckline.
NASDAQ COMPOSITE –
- The difference between the NASDAQ and the DJIA is simply that it is still above it’s neckline.
- However it is making lower highs and lower lows in the right shoulder.
- There is very little evidence above the fact that it is still above support, that this is going higher.
- We will change our mind when the market does by starting to make higher lows and higher highs.
- Counter trend rallies are not trend changing.
Continues to be in a very steep down trend. Last week we had 52% of stocks above the 40 DMA. We are now at 48% If the market is going to rally, you’d like to see this deterioration find a bottom.
The Bottom Line:
The markets remain just below all time highs but in a very choppy downtrend. There is no argument to be made against that when we are making lower highs and lower lows both on a larger weekly picture across all the major indexes as well as the hourly time frames which I attempted to articulate above. Personally I do not fight trends, I much prefer to join them by identifying them (like we did above), by picking places I might want to enter in the trend direction with as little risk as possible. Currently that alignment is still telling me to prepare for more downside as we have all major indexes in downtrends. I must first see evidence of that change before I change that posture all too much. Now with that being said, the first thing on my Radar Monday will be to watch for evidence that this is a higher low, that could take us higher.
This Week’s Chart’s in Focus:
Let’s review a few charts that I consider worthy of your attention:
Transports (IYT): We looked at this one last week, and this group spent most of this week trying to trap the bears. On a weekly chart it was an inside week, so we need to watch this one for further strength above last weeks highs.
Yen: Seems to be at a very interesting level if buyers are going to step back in. Despite some weakness the past few weeks the uptrend is still in place.
ALGT->The airline sector as a hole looks horrible. Watch to see if that 130 level can be breached to confirm what appears to be a very nice H&S topping pattern. Notice the right shoulder resistance was right at the VWAP off the recent highs.