The sp500 today is getting hit very hard especially within the context of the previous multi month ‘trickle up’ tape action. It remains to be seen how the market closes today but this is clearly a sign of weakness and supply coming into the market. At 2:11pm the volume on the SPY ETF is close to 200 million shares. Today is likely going to be the heaviest volume on the SPY ETF for the last few months duration. The fact that it is down volume is an important clue about a possible change in character of the market.
The end of day volume will be interesting. I would prefer to see it at 300 million or greater on the SPY as an extra strength signal that we are really headed into more dramatic weakness.
Despite today’s decline, I still do not believe that we are at an ideal level for shorting the market yet. My basis for saying this is the apparent similarity between the current topping process and the April 2010 top. Even if we did not have the price action of April 2010 as a clue, usually the first hard down move right off the top of a very strong previous trend is met with an equally strong upwards reaction rally that is not able to exceed the high of the initial strong down move.
In the daily candlestick chart of the sp500 above we see the April 2010 topping process and the current possible topping process. Both processes appear to have a head and shoulders topping formation. Today’s decline in the sp500 looks like it could market the completion of the head formation and so I would expect a violent upwards reaction early next week perhaps into Wednesday (and likely on low volume) that would make for an ideal shorting opportunity. Assuming that occurs then it would be the top of the right shoulder formation and then lead to the real decline perhaps down to the horizontal dotted support range in the chart above near 1220. 1300 to 1220 is about a 6% decline which certainly seems plausible for this market given how overbought it has become. Whether more is in store after that remains to be seen on behavior at support levels.
I will be looking to go long either the TZA, SDS or EDZ sometime next week assuming we get my anticipated violent upwards reaction rally that will at first sight seem like total relief for the bulls, but in reality likely be offering bears fresh red meat for the taking.
I have not drawn in a support line on the RSI portion of the chart above but if one is drawn on the RSI from September 2010 to the November 2010 valley and then to the current RSI we can see that RSI is currently in a supportive channel range which supports my strong bounce theory next week for the better shorting opportunity.
A slightly alternative scenario is that the market will continue down slightly on Monday of next week to test the 1/20/2011 reversal hammer and then start to build its upward reaction from that level.
Ideally the market will be able to bounce up to 1296 range as a trigger for going short. It took 4 full trading days of upwards reaction after the decline on 4/27/2010 before the market fully fell apart with fast ease of movement.
The weekly candlestick chart is showing a very similar shooting star candlestick like the one that occurred two weeks before the mega drop in April 2010.