Bear Case Confirmed Today

The bear case was confirmed on many fronts today in my opinion.  I continue to believe that the recent highs in the market are the final highs for at least several months. 

Here is a quick summary of reasons why:

  • The bullish divergence in the US Dollar Index (and also the UUP ETF) was confirmed today and we saw record all time high volume on the advance in the UUP today.
  • The SP500 bearish divergence was also confirmed today and price is now ‘relieving’ the divergence.  Divergences can lead to persistent and significant price declines.
  • A 2B buy signal was initiated in the UUP today and a 2B sell signal was initiated in the SP500 today as well.
  • The WEEKLY MACD in the UUP ETF is about to turn upwards and the WEEKLY MACD in the SP500 although not in a bearish cross is slowly getting there.
  • The downside volume today in the SPY ETF was heavy again coming down off the highs.  Not blockbuster volume but still heavy relative to what we saw on recent advances and shows a character change volume wise in this market.  Heavy volume downside price action off of all time highs is never a good sign.
  • The Dow Transports are breaking down bad after a double top earlier last week.
  • The gap up and run moves in big stock names like AMZN, MSFT, GOOG and some others will not likely get sold off and help the current correction gain some steam.
  • There is a risk of an ‘island top’ forming in a few indices if we get a gap down tomorrow.  Island tops are very bearish and rare technical analysis patterns. 

I don’t expect us to go down in a straight line, but I do expect this WEEK of market action to close badly by Friday.  Best case for the bears is a close near 1030 as I alluded to in a previous post as it would create a NASTY monthly October reversal bar and set up bearish November price action.

We may hit some sort of oversold bottom sometime tomorrow and then do a dead cat bounce for a couple days and then start heading down again Thursday and Friday.

The price advance in the US Dollar Index could possibly do a sharp continuation into its own 50 day moving average.  Remember, everyone hates the US dollar based on sentiment readings and that creates fertile territory for a HUGE short covering rally.  So we may jump into the 50 day moving average on the US Dollar tomorrow and create a short term high in the index and a short term low in the broad market.

TZA and other double, and triple short ETF’s continue to have very bullish looking charts are are in my opinion the best way to play this decline into end of October and November.

Posted in Index Trading, SP500, Technical Analysis
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