As I mentioned in the comments yesterday, the market has had to expend a lot of buying power to overcome the large gaps down in the morning that we saw on Thursday and Friday. And all of that buying has pushed some indicators into overbought territory. One of which is the 3-day moving average of the TRIN. Take a look at this chart (click to enlarge):

The purple line at the top is the 3-day TRIN, and the SPX is below. When the purple line crosses the red line, you get a sell signal. This has been a very reliable indicator during this bear market, and the two black arrows show the last two times it raised the alarm. After each incident, the market pushed a bit higher, and then fell for several days.

If the market is able to make progress next week, it is likely to be short lived.

Here is a chart of the NYSE Advance/Decline Line (click to enlarge):

The uptrend line (black) for the bear-market rally was snapped on January 14th (black arrow).

The market has found support at the red line, which was resistance earlier in the rally. However, it has been unable to rally off of the red line, and on Friday was only able to manage a tiny, feeble bounce.

If the red line gives way, there should be some support at the green line though it doesn’t look to be very strong. Falling through the green line will be a very strong hint that we are heading to the November low. Or should I say “continuing” to the November low? After all, important elements have already taken out their November lows: XLF, Apple, GE, etc.

The purple line shows that the A/D line was able to match its election-day peak while stock prices were not able to do so. So, while stocks were advancing, they weren’t advancing by as much price-wise.

Here is a daily chart of the IWM showing a bullish falling wedge pattern (click to enlarge):

Notice that the lower blue line, which began on October 14th is still a force. The wedge is only a few days old, but I extended the lines backward to illustrate how long they have been in play.

A potential scenario is that prices will pop out of this wedge, squeeze the shorts, and build a bull-trap before rolling over and testing the November low. The rest of the market would likely follow a similar pattern.

Market Plays With Fire
By dilly-dallying around 800, the S&P 500 is playing with fire. Pull up a weekly chart and you will see what I mean. The last weekly close under 800 was on April 25, 1997.

Good Calls
Kudos to both Helene Meisler of RealMoney.com and Jason Goepfert of SentimenTrader.com for giving the heads-up on the big banking bounce. Both made the call during the day on Tuesday and correctly predicted Wednesday’s rally. Meisler used her charting techniques, and Goepfert used his statistical approach, and both came to the same conclusion. I subscribe to both sites, and both Meisler and Goepfert are excellent analysts. I read them before the open every morning.

Candlestick Pattern
SPY’s last two daily candlesticks are pretty close to a bullish harami, however prices may have moved down too far Wednesday morning. If you look at IWM’s candles you will see what I mean. Perhaps SPY will have a bullish follow-through today, though weaker than might be expected from a clean harami.

SPY Gap
You have SPY’s gap from Tuesday morning marked on your charts, right? That will likely be an important resistance area. There should also be a good deal of additional resistance coming from the bulls trapped at 850 who will be selling in relief after grimly holding on through the plunge to 800.

$TIKSP
The tick count for the S&P 500 hit 212 on Wednesday indicating a good deal of froth. The last two times it spiked to this level were on December 8th and August 8th, neither of which were a good time to be long.

I’m thinking that with the combination of bullish and bearish factors we have, the market might build a short-term top over the next two days or so, and then get back to bear mode.