Monday, July 12, 2010
First Signs of Weakness Present; Now Need the Actual Rollover
The market is working hard to make any upward progress now, suggesting that the buying euphoria, or should I say the short covering euphoria, is almost over. The S&P has stalled hard right in the center of my reversal zone I mentioned early last week. The MACD has now crossed down on the hourly chart, and the daily RSI is in good territory to support another big down leg in the market. But we have no rollover or decline yet, so the market can easily shoot or grind higher from here. I can see a big shot higher tomorrow followed by a big reversal. That may be the shot the bears need to finally suck in the last of the bulls in the market before smacking them down with great bear force and numbers. We'll see. Any further rallying that gets into the 1185-1190 area would have me adding to my short positions with a stop just above 1131.23.
Although it appears we could easily get a sharp shot higher that will lead to a quick reversal, the divergence between the Dow and the other major indices left today is worth noting. Although it's by a very small margin, the Dow has made a new high today while the S&P and Nasdaq 100 has not. Now this divergence dwarfs in comparison to the big bullish divergence I pointed out July 2nd (click here) which led to the recent monster rally of wave '(ii)' we're currently in, but it's still a divergence and it's especially worth noting because Dow component Alcoa announced good earnings data tongiht which has the stock up over 3% after hours and might lead to the Dow rallying to new highs again tomorrow. This may further stretch the S&P and NDX's divergence from the Dow if they don't make new highs themselves. So I'll be watching that closely as a possible sign of an imminent top in the overall market.
So as I've said the past week, despite the market closing higher everyday, the internals continue to weaken every day as well. This is consistent with a correction. And although this can all be eliminated with a big up day tomorrow on strong internals, right now the data supports the recent move higher being a correction. Today the trend continued as the major indices squeaked out minor gains while internals actually turned negative as you can see above. Also, volume was well below the 13 day moving average at less than 1 billion shares on the NYSE. And the NYSE closed down today while the Dow closed up. This sometimes results in a sharp selloff the next day. So the market's rally has weakened severely, and the wave count, momentum and retracement indicators are ripe for a top and reversal at any moment. The market appears to be gearing up for a sharp move, and the current evidence suggests that move is to the downside. But just in case that move is to the upside, I hold that 1131.23 is the key level the bears need to hold.
Lastly I wanted to show the fractured nature of the market at what might be near topping levels. I interpret this sign after a sharp move in the preceding days as an exhaustion of that move. But last time all these indices were this mixed on light volume we had a monster rally the following day. Nothing is perfect, but I did want to point out the mixed nature of the overall market at this point in the rally. A big move appears imminent in the near future.
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.