On Friday afternoon, SPY dipped down to fill the opening gap-up from December 16th. However, the Q’s only partially filled the gap, and that is a mildly bullish condition for the Q’s which have been stronger than SPY recently.
The XLE may be on a mission down to fill the large gap-up left from December 8th. Also, notice the double-top pattern on its hourly chart with peaks on the 11th and 17th. A lot of other charts have that double top too.
As I wrote last week, this rally looks like it is losing steam and is in the process of rolling over. While the “process” can go on for weeks, this looks like a textbook bear-market rally roll-over. One of the techniques you can use to analyze the roll-over is the “Three Fan Line Rule.” I used the rule here to correctly identify the end of the March-to-May bear-market rally.
On my hourly SPX chart, I now have four fan lines drawn from the November low (click to enlarge):
On my chart using daily closing prices, I only have two fan lines so far. So, maybe the market can run a bit higher.
There is a lot of debate whether the correct pattern for the market is an ascending triangle or a rising wedge. I prefer the wedge because it is bearish and fits better with the actual fundamentals of the economy. An ascending triangle seems to be way too bullish as the economy continues to decelerate.
However, both patterns are unsatisfying because in both cases you have to keep re-drawing your up-trend line. Right? Prices keep pushing the up-trend line down in little dribs and drabs. That’s why I’m showing the hourly chart here. I have my four fan lines drawn through dips labeled F1-F4.
In a strong uptrend, dip-buyers would come in eagerly at the up-trend line, over-joyed at the opportunity to buy stocks cheap. But what we are seeing now is that the dip buyers are often late, and are failing to recruit new bulls to their cause since prices are not making substantial new highs.
The Detroit Bailout sent the S&P 500 “soaring” a whole 2.6 points Friday, and this month’s “Options Expiration Surprise” fizzled out. The crowd wasn’t leaning short, so there weren’t enough suckers to be fleeced this time, and no short-squeeze rally was to be had. I’m thinking that this will cause shorts to become more aggressive.
The three-day TRIN average is oversold, so we may see some dip-buyers step up on Monday. However, if the market can’t bounce early next week, then the bulls may have a problem.
TrinTastic!
If you heeded my TRIN Alert two days ago, you dodged the first two days of back-to-back selling in almost a month. I went short at 912 then, and covered today at 876.
The market has now worked off its extreme overbought condition and should be able to recover a bit. Will the market’s future be like…
August in December?
On May 21st, we had a high-volume snap of the uptrend line that “rang the bell” at the top of that bear-market rally. But in August, we didn’t get that. Instead, the market just slowly rolled over, and I think there is a good chance that this rally is doing the same thing.
Candlestick Pattern
The QQQQ’s two-day candlestick pattern is very close to a Bearish Harami Cross. Even scarier is its four-day pattern which is almost identical to the pattern leading up to the historic crash on December 1st. SPY’s patterns are similar.
Overbought Signals
The equity put/call ratio is at a level that usually precedes selling.
Battle Over 900?
The overnight futures have been curiously flat just above 900 as I write eight hours after Wednesday’s close. Maybe this is because the battle over SPX options has begun. There are 234k $900 calls in the money now and 241k $900 puts out of the money. So the forces are roughly balanced, and maybe the SPX will be flat around 900 on Thursday. The winners are declared at Friday’s open. There are slightly more put-holders, so maybe they will have more collective firepower to push the market under 900.
