Short Lived Stock market bounce

I really thought the recent sp500 bounce from important Fibonacci levels would last a bit longer and travel a bit higher.  But today’s reversal at end of day creating a shooting star reversal candlestick has put a lot of doubt into this expectation.

The reversal today at end of day in the form of a shooting star candlestick occurred the day after a strong oversold bounce which we saw on Monday this week 5/21/2012.  It can be very confusing to interpret these types of one day moves in the market.  But from my experience, a reversal of today’s type is to be given the bullish benefit of the doubt if we are in a strong bullish up trending with weekly bullish signals.  In other words, if we were in a strong bull trend on the weekly basis, then today’s reversal would most probably be ignored the next day and you would see the market move higher easily the next few days.

But in a bearish down trending market, a reversal of today’s type is more suggestive of exactly what the candle wants to suggest… a hard follow on down day the next few days.

The fact is that we have not seen a true bearish capitulation in our markets yet.  We have been in a somewhat orderly decline without very wide and deep price declines.

A few other bearish cues revealed themselves today:

  • The Euro (FXE ETF) tried to bounce and hold off the 126.30 and failed to do so today.  In fact it is starting to look like now it wants to break this key support zone and break to new lows aggressively.
  • The contrary is true for the US Dollar (UUP ETF).  The UUP moved up aggressively today and looks like it wants to bust up above 22.64 which would be a key signal for the strength of the US Dollar which could put a lot of pressure on US equities especially if the UUP really gets a more aggressive advance going.
  • The VIX (Volatility Index) did an reversal hammer retest of the neckline of an inverse head and shoulders bottom pattern today.  This suggests to me that the VIX (fear index) wants to move higher, perhaps faster and sooner than we currently realize.
  • The first two points in this list do not auger well for commodities and gold.  I wrote a piece about how the gold price could be in big big trouble from a very longer term perspective as it may be ready for a correction of much greater magnitude and length of time than we have seen since the start of the bull in 2001.  In that article I stated a conditional behavior for the gold price.  There is still a chance for it to ‘come back’ but we are in a critical time zone where this must occur.

So what is the bottom line?

The bottom line appears to be that we are about to head lower again perhaps in more aggressive fashion this time.

Obviously for this to occur we need to see the sp500 break under and through 1292 decisively.  Until that happens then we could still give the market a little benefit of the doubt that it may want to consolidate more and try to work higher.

But for now my read of the tape is telling me we are about to go down hard again.  If that is to be the case then for the most bearish version of events it would be required that RSI (relative strength index) break back under the 30 level and then print a new lower value than the one that occurred on 5/18/2012.

If it does not do this then it sets up the possibility of a bullish divergence on the short term time frame.  If it does print a new lower low then we may see substantially lower sp500 values.

P.S. It is also worth mentioning the psychology of these ‘3 day weekend’ setups which we are heading into this weekend (in the USA).  This up coming weekend is a 3 day holiday weekend (Memorial Day).  USA markets will not be open on Monday May 28th, 2012.  So from the psychological perspective these 3 long weekend days can serve as sort of a very large form of potential energy where investors and traders have time to ‘stew’ and think about their trading decisions leading up to this long weekend.  It can tend to create a big POP in volatility after the holiday weekend is over with.  So it sort of depends on how the market closes into the weekend.  If it closes semi hard down into the weekend then it might lead into a huge flush out sell off when the market’s re open after the holiday.  Contrary to that is if the huge sell off occurs right before the weekend it can tend to clean everybody out and then allow traders to re asses the situation over the weekend leading to a big up day.

My main point is that the 3 day holiday weekend can serve as a pre cursor to a big dramatic POP in the market either up or down that otherwise might not occur.  The potential energy builds up and then unleashes all at once as markets re open.

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