The market as represented by the major indices has not been able to make new significant upward ground in recent days. Essentially the indices have been flat the last 5 days. This flat sideways market action is occurring at the same level as the ‘twin peaks’ of July 2011. It could be that the market still wants to initiate a correction from the current level.
The NYSE summation index is not in a bearish stance yet but it could be starting to curl over.
Perhaps more importantly the XLF ETF has still not been able to exceed the large bearish gartley formation I wrote about several days ago.
That bearish gartley pattern in the XLF is still at this point not invalidated in my opinion. In the initial post on that pattern I indicated it could be a clue the rest of the market wants to initiate a deeper correction. But for now it appears that the current market correction is well contained.
The upward momentum has been so strong recently that any initial downside move is likely to be meet with an initial upwards counter trend rally.
Still, despite the potential here for a deeper correction, I find myself still giving a large benefit of the doubt to the bulls. The larger structures of the market are bullish and it will be difficult to gain major traction for extended downside. Extended downside could occur in the future, but there is so much ‘ preliminary damage’ that needs to be done first to get to that point.
The bottom line: it is probably not worth trying to make any downside market index plays at this point.
The risk is that the market simply plows sideways or only only a slight downward slope and then breaks out above the July 2011 peaks in a true breakout.
The weekly trend and monthly trend is still in bullish mode and has plenty of upside momentum left in it. It is only the current daily action that puts the market in a position where it has to work off some of the daily overbought levels.
The tape action of the market describes a slow upward trending market with limited volatility. This is reminiscent of the 1995 style market action or 2004 to 2007. Strong upward trending action like this usually makes it not worth trying to short the market. There may be occasional short opportunities, but odds favor upside. The length of time a market can drift and trend upward can be for months or even years, with the occasional sharp and quick corrections to work off overbought levels.
If we do get a deep correction in the near term it is likely to be sharp and quick and the market is likely to use that sharp correction as fuel for a new rally and quick turn around.
The bottom line? :
The market is currently in a close enough stance where we could see a real downward correction that is meaningful but the bears really need to prove the case and overcome the tremendous upside momentum on the weekly and monthly time frame.