The market delivered on my wish for either a flat or negative close today. We needed a flat or negative close to keep the accelerated bearish forecast intact and that is how we ended today.
The bear flag shown in the chart above is at a point in its construction where it needs to either be confirmed or choose to fail as an indicator of the recent trend. Simply put, there is no room left for it to keep forming without putting into doubt its integrity. My reasoning for that is that it has bumped up right against the primary downtrend resistance line, so it either confirms or fails on Tuesday February 16th, 2010.
I suspect that a large part of the buying and relatively flat close today was due to heavy short covering considering Monday is a holiday for US markets. Most traders would rather not hold a short position over a long 3 day weekend. The psychology that makes that interesting is that you could go in Tuesday AM market opening with the shorts out of the market and no buyers to be found. That type of setup is the stuff that creates very large air pockets in the market (ie. gaps). Also significant is that China is on Holiday for most of next week and so that is another element of demand that will be somewhat absent from the equation.
The clue as to whether it confirms the pattern or fails is most likely going to be revealed by the action in the Euro and/or Dollar early next week. The Euro is at a point right now (similar to the Dollar) where it is overdue for a large upside reactive rally given the heavy oversold level it is at right now. However, I have also seen many times a stock or index move from a trend of orderly trending bearish tape action into a much faster vertical type panic cycle. That type of action would be disruptive to the markets and would help the SP500 confirm the bear flag and get a break down going next week that could be quite large in magnitude.
The Dollar is also set up similarly. We could see the US Dollar get a ‘super spike’ higher into next week that would spook the markets and cause disruption.
If I am wrong, then we will instead see the normal typical price action that we are used to. Namely the dollar could start correcting downwards from its recent strong rally and the Euro could start correcting upwards for a more natural corrective process.
We really are at such a close ‘tipping point’ that it is too tough to call with high confidence which scenario will play out. My bias is that we do get a fast breakdown in the Euro and a fast break up in the Dollar and that these events cause the market to go south in a hurry next week, perhaps even starting with a large opening gap down Tuesday in the AM leaving little chance if any for new shorts to take a position, or buyers an easy chance to get out of longs that were recently entered.
So the market heeded my request for a flat or negative close today.. will it oblige again next week? Stay tuned…