Sp500 Recap to end the week May 11 2012

Over the course of the last few weeks I have had a bearish slant on the market indices from a long term perspective particularly the monthly chart time frame.  I have to admit that on the daily time frame right now I am not seeing much follow through on the downside.  This could mean one of two things.

  • The market is still in a very early bearish phase and it has not worked up to the point of ‘sealing the deal’
  • The market simply does not have enough downside energy and wants to go back up to the highs again.

The SPY is trading in a small rectangle with a move preceding it and so the typical interpretation is that there will be a follow on move that is equal in magnitude to the first leg of the move.  It is also important to note that price has stopped at resistance level of 136.90 level and so far at least not been able to break back above it.

The confusing aspect of the market right now is that there are multiple interpretations.  For example, an inverse head and shoulder’s could be forming with the more recent price action forming the head of the inverse H&S.  That would support the idea of an eventual move back up to the old highs and clearly negate the near term bearish prospects.

However, as of right now, the market as represented by the SPY has not been able to break out north out of the current rectangle.  This is a fact.

Adding more confusion to the story is that there exists a potential bullish divergence between price and MACD histogram on the daily charts.  If true then it would mean a likely move back up to the highs again.

The bottom line really rests heavily on how we close this week.  If we close near the lows today then it would seem to set up a more bearish outlook for next week and support the idea that we will break down out of the current small SPY rectangle formation.

However a close near the highs today would set up a constructive weekly hammer candlestick and add a little more weight to the bullish argument or a northward break up out of the current small rectangle formation.

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