Tuesday, August 3, 2010

Market Should be Ending Rally



There was no follow through to the big rally yesterday. Today's internals were quite negative in both the NYSE and S&P as you can see above. Although volume was very low, and well beneath the 13 day moving average. But I too see this as bearish since we did have a huge rally that seems to have surprised a lot of folks and give the "all clear" sign for the market to get back in bull mode I'd expect to see a big spike in volume as the masses rush back into stocks. But volume was also well below the 13 day moving average on yesterday's huge rally, then was even less today. That's not very bullish in my view. And in fact, volume has been declining ever since July 29th, which was the last time the 13 day moving average was breached, and that was a down day. So since then, we've had declining volume, yet the market has worked higher. This is the characteristics that accompany a top. Which I feel is at hand, or very close.



Above is a 2 hour chart of the S&P cash index and RSI momentum indicator. You can see that the evidence of a weak rally is also strong with this data as well. You can see that the rise the past few weeks looks a lot like a wedge, which is typically a weak structure; whether it be part of a wave C ending diagonal or leading diagonal, a sharp and deep reversal should be coming soon. In addition to this wedge structure, the weakness is also illustrated with the fact that price has made two higher highs so far, and yet the RSI has made lower highs, not confirming the rise in price. Again, this suggests that this market is topping and a sharp reversal is coming soon.

Although this evidence is not good as far as timing the market reversal, I'd say that the easy money for the bulls is over, and I think it's time to try and start getting short when opportunities arise.











And lastly, it's quite clear on the daily charts above that the Dow is leading the surge higher while other indices are lagging. And the higher the risk in the index, the further back its lagging. I posted some charts this morning comparing the Dow to the other indices' highs from back in late June. Well also notice that as of today's close, the Nasdaq Composite and Russell 2000 have not even been able to exceed their July 27th highs, with the Nasdaq 100 barely exceeding it. This behavior is bearish as long as it remains in place. When you combine the fact that other indices are lagging the "cream of the crop" Dow index, and that volume in the market is declining, it seems that interest in this rally and the bullish side is fading big time.

Now a big rally on strong volume that brings all these indices above their June highs and gets new highs registered on the RSI will negate all this topping bearish view. But as long as the evidence does remain intact, I view the market as bearish. The small waves of the yesterday and today suggest a possible small 4th wave triangle forming. If correct, we should get one more sharp thrust higher. But thrusts are terminal moves and completely reversed in fast order. And considering the evidence I mentioned above, signs of a "finishing move" like a thrust from a triangle would be a great opportunity for the bears to get short again, in my opinion.

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.

2 comments:

Blankfiend said...

Excellent post and analysis Todd! Thank you.

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