The sp500 today dropped down hard and fast in what seemed like a disaster. However in context, we were way overdue for some type of drop after the previous huge multi day surge that sent the market up for multiple days.
A number of ETFs as of last Friday were right at a previous peak and it was only natural for some type of drop to occur.
The question now is whether or not this initial drop is going to morph into something more sustained and then create a right shoulder of a head and shoulder topping pattern.
The monthly sp500 still seems to paint a possible bearish picture as we are trading still in this large bearish divergence and the current monthly candlestick for July is in the form of a gravestone doji. If the gravestone doji shape holds for the second half of July 2011 then it could be a big problem for August and September.
September is typically a HORRIBLE month for stocks and August is the ‘prep’ month for that horrible September. Plus we have this debt issue that could turn into a ‘black swan’ event into this time frame.
The June monthly candlestick curiously looks somewhat similar to the super bearish hanging man candlestick of 3 months previous to that. So we have two monthly hanging man candlesticks and now this monthly reversal gravestone doji in the middle of low volume July.. hmmmm
I think what I am going to do is give the market some wiggle room to figure it out and mark 1295 as the must hold level. If we break under 1295 again then this market is toast. But as long as we hold above that, I am willing to give the market the benefit of the doubt.
But I do have to admit that the monthly is stubbornly sticking to its bearish type outlook and today’s drop seems to be confirming that bearish type outlook. But one day does not a trend make. Lets see some downside follow through and loss of price support before assuming this is a real and valid massive head and shoulders top.
In these head and shoulder patterns I have seen the right shoulder form with quite some speed in some cases. And the timing of the right shoulder and the up coming September seasonality (bearish) seems to suggest we could be in for a steep drop as we progress…
To sum up, it will be ‘trouble in paradise’ if we bust under 1295 again.
Oh, I forgot to mention.. The ARMS today closed at around the 5 level which seems a bit troubling from a bearish perspective. To have it shoot so high so fast on just a one day decline seems like fear came in too fast.
P.S. I am still working on the ‘100lb Guerilla Trade’ report and hope to have it available some time this week…