The next 3 trading days or roughly 20 trading hours are going to be interesting to observe. My observation of the daily candlesticks of the last few days says that the market appears to be slowing in upward momentum with some signs of supply coming into the market or at the very least ‘pausing action’. It is also true that we have still not seen any significant technical damage to the uptrend that would cause many to be much more confident that we have reached a trend change.
Yesterday’s shooting star candle on the daily bar on most indices failed to confirm today as a bearish sign. I thought at some point today that a few indices might print an extremely bearish daily candlestick pattern called a ‘tri star doji’. But at the end of the day this was not the case. Still, sometimes ‘close enough’ candlestick patterns still give the same signals. The last tri star doji pattern I remember seeing was in CAGC between March 10 and March 15, 2010. It lead to a huge one day drop after the pattern was complete. But the current pattern in most indices is far too messy to say with confidence that it is a tri star.
I will switch back to BOT short maybe tomorrow if there is enough potential for some type of down ward break. The upside seems limited, however there is still some economic data coming out the rest of this week that might spike up the market a few more days.
I challenge any bull out there to tell me how a huge new advance is going to occur with the percent of stocks above the 50 day moving average looking so toppy. The 5 day moving average has crossed below the 10 day moving average similar to the April 2010 time frame. This chart is almost in the same stance as was the case near the April 2010 top. The problem becomes whether not it is valid to make a comparison to the April 2010 top because the market was at a completely different stage at that point. The one similarity I did notice between the rally that went up to the April 2010 top and the current rally since September 2010 is that the average volume on the SPY is roughly about the same, near 180 to 190 million shares. In other words a very low volume light rally.
The summation index continues to be in ‘drifting mode’ and is only inches away from a bearish cross of the 5 EMA under the 10 EMA. I noticed that the Volatility index today was quite strong despite lackluster action in the market. Also the UUP US dollar ETF was strong today and is showing a nice weekly upside reversal and a weekly bullish stochastics crossover that is in a stance to break above the bottom 20 percentile line.
Just looking at the stance of the US dollar seems to suggest that the Fed next week will under deliver and cause the market to enter some serious downside.
The weekly chart of the NYSE composite index a very broadly diversified market index shows that we recently printed to weekly doji candlesticks and are sitting right on the uptrend line. Also notable is that the weekly MACD histogram is showing a bearish triple M possible sell signal which would be confirmed with a close under the horizontal red dotted line in the chart above.
The weekly stochastics are showing that we are in about the same stance as was the case during April 2010 with the weekly signal line of stochastic right now at 83.46 whereas in April 2010 right before the start of the big drop we were at 83.72 on the signal line. When the weekly stochastic signal line in April 2010 busted below the 70 percentile line the very large two week drop began. If the weekly stochastic again crosses below the 70 percentile line next week then one has to be at least open to the possibility for another 2 week drop in the market. How ‘big’ that drop would be is of course open to debate.
The vertical solid green colored bar and vertical solid red colored bar at the right side of the chart shows that the NYSE next week must make a decision to either break under the supportive September trendline or to break under it. If the market loves the Fed verdict and maybe gets a trillion of QE maybe we would blast higher and take the path of the solid green line. If the Fed does not deliver enough, then it would seem we would take the red line path.
The NYSE seems to define the setup very clearly. I can go with hints of what the US Dollar and the VIX is saying and tell you that we are going to bust down next week. This seems to make sense and would be the typical ‘sell the news’ type situation. But there is still part of me that is afraid the Fed will act like drunken sailors and deliver a half a trillion to a trillion and cause the market to blast higher in a drunken frenzy causing the US dollar to almost collapse.
But since the stock market is a game of odds, I have to say that the odds (based on my read of all the indicators combined) favor a break DOWN next week.