Wednesday, August 4, 2010
Not Much Changed From Yesterday; Market Still on Verge of Reversing
The market didn't do much today so nothing has really changed in the outlook from yesterday. The Nasdaq Composite and Russell 2000 still have not made any new highs to confirm those in the NDX, Dow and S&P. As long as those divergences remain in place, the bearish potential is great.
Above is a better illustration of the wedge formation I mentioned yesterday. In EWP, they usually are "leading diagonals" or "ending diagonals". Both are weak structures and the ending diagonal is a finishing move, which can form a wave C which might fight nicely here, and result in sharp reversals. Whether or not this particular wedge falls right into perfect EWP form or not, the structure of the rally in this manner is a weak one, and it's exhibited in several intraday momentum indicators. When the market does finally pull back, I expect the S&P to get to at least the 1100 level in quite a hurry. And with volatility so low right now, I put a very small short term put option position that I will either cash out on a sharp decline and VIX spike, or will just let it run out and expire worthless.
Above is a daily volume chart of the NYSE Composite. Today's internals on the NYSE were quite strong however volume was so light, less than 1 billion, that I'm not sure how reliable that strength was. You can see above that after that July 29th down day and volume spike above the 13 day moving average, the market has gone to new highs but volume continues to fall further and further away from the 13 day moving average. So this latest rally leg higher in the S&P since July 29th is quite shallow in strength and conviction and so I feel it will be completely reversed rather quickly.
Friday is the all important jobs number so perhaps traders will just wait until late Thursday and Friday morning to take bigger positions and get some volume back in this market. A short pop higher might occur before a top is in, but the evidence suggests a sharp move to the downside coming soon that should quickly test the 1100 level in the S&P.
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.