The blue chip indices popped to a new high this morning and then reversed, just as I forecasted last night. However they did not selloff as hard as I anticipated. The market’s structure is definitely weakening again, and momentum indicators are bearish as seen by the two orange lines on the above chart. You can see on that 30 minute chart above that price was making new highs (top orange trend line) while the stochastics were making new lows (bottom orange line). This bearish divergence is also occurring on the 1 hour chart as well, and signals some type of big decline is coming. MOST LIKELY TOMORROW.
One thing I’ll be watching during this decline is the breadth, volume, and wave count of the move. In order to have confidence in my current wave count which calls for a wave v to a new low, I’d like to see weak breadth and strong volume with small 5 wave declines on the way down. Today that did not happen. Wave structure is unclear, and breadth was slightly positive on the NYSE with 65% of all stocks advancing, and 53% of total volume going to advancers (Scottrade). However today’s total volume was not strong at all, and the indices actually closed slightly down. So it appears like a “nothing day”, with no one really participating and no one really winning on the buy or sell side. This type of behavior often happens right before trend reversals, the calm before the storm affect, as everyone stops trading because they’ve done what they’ve wanted to do up to this point and they’re now waiting for direction. According to the wave count I have, and the bearish divergence in the stochastics, it seems clear to me that the next move is down.
Tomorrow (Tuesday, 7/22) will be a big down day.
-Todd
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