The SP500 Topped Today and it is Time to be Bearish

spyetf20090923 The market topped today in my opinion and caution is advised for the next few weeks as I think we are in for some pretty severe downside.  There were plenty of significant reversals today and it looks like the SPY ETF showed a bearish engulfing candlestick pattern on heavy volume.

The structure of the market right now is still setup in a bearish divergence when we compare it to the pattern of the MACD.  It says that we should now have at least a month of downside price action with a few intermittent rallies in between.

Almost everything reversed today and a lot of the indices look bearish now whether it be stocks or commodities.  There are bearish divergences all over the place.

I am also seeing RSI (Relative Strength Index) confirm this top.

It is going to be important to see confirmed heavy volume on this decline to confirm that we are in a move involved correction.  The volume on the SPY ETF on September 1st 2009 was 321 million shares and the price low on that day was 99.99.

The first confirmation clue that we will be in a more involved downside correction on the SPY is a break below the 104 level.  So far this market has defied all odds and continued to trickle higher and higher inch by inch and almost every little reversal was met with new buying power.  I suspect that this time the buyers will hold back a bit and that should give us a break below 104 to a first target of 99 on the SPY.

I definitely would not recommend being long anything at this point, not commodities nor stocks. 

The only thing I would recommend being long at this point are the inverse ETFS for example the TZA (Russel Ultra Bear 3X ETF), or the SDS (ProShares Ultra Short SP500 ETF).  In a down market these two should be able to get a nice topside bounce.

Trees don’t grow to the sky they say, well for a while it certainly seemed to be the case that they actually do grow all the way to the sky.  But today’s action and reversal combined with MACD close to being a confirmed bearish divergence and RSI confirming the bearish signal along with volume says that we have topped out.

Be careful prudent and patient until we know how deep this correction is going to be.  There may be new long side setups in a month or two, but possibly as far out as 3 to 6 months.  If enough technical damage gets done over the next few weeks then it will take the market time to work it off and we cannot rule out that process taking 3 to 6 months, similar to what occurred in the 1974-1975 period after the initial super spike rally from the bear market lows.

Posted in Index Trading, Market Timing, SP500
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