Wednesday, June 16, 2010
Rally Out of Gas For Now
As I said around midday today, the market rally is quite labored. Although some indices closed positive, the market was negative today. As you can see above, there was solid downside pressure on the market with decliners beating advancers on the NYSE, and downside volume well outpacing upside volume. The S&P internals sported similar behavior. So the majority of action today was to sell, and only a small group of stocks held the market up. This is what occurs at the end of market trends as stocks start to peel away early from the previous trend and just a small few shoot higher as they're completely ignorant to the change of trend occurring. On top of that, the rally of recent weeks has been done on weak volume as well, suggesting that overall, the masses are not buying into this rally. So there's all around internal weakness, so I expect a pullback very soon.
Above is just a good example of how fractured and unhealthy the market has become with a rainbow of up and down indices today. This type of behavior, especially that when the Dow closes positive and the NYSE closes negative, suggest a reversal to the downside is on the horizon.
Of course, the market can erase all this "weakness" with a strong push tomorrow, but the evidence doesn't support that happening. Right now the evidence suggests that the market rally is severely weakening and that a reversal is imminent. It's all about probabilities, and the market will probably decline tomorrow and/or Friday.
In addition to internals, price is showing us an ending diagonal looking pattern into the 1119 level with diverging momentum as seen by the RSI (purple indicator at bottom of the chart). Ending diagonals are structures illustrating a severe weakening of trend. They are usually sharply reversed. My initial target for the decline is the 1089 area in the S&P cash index, but it has the potential to snowball into something much bigger. Remember, I'm waiting for wave 3 of  or C to get underway any minute now. There's no evidence now of this occurring right now, but any potential top and decline should be looked at as a possibility. I added to my short positions today to at least catch a near term decline. If the decline does occur soon, then I'll simply set my stop loss at the recent swing highs, and then hopefully soon to break even, and try to catch at least a modest decline in the market to scrape a few profits together.
One thing to keep in mind is that the end of the 2nd quarter is upon us so it can get kind of whacky for the next two weeks. So this "weakening structure" can hold for quite a while as the market grinds higher as money managers maneuver around for end of quarter positioning. But at face value, the internals and price action of the market look bearish, so I'm trading accordingly.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.