The sp500 today is getting hit very hard especially within the context of the previous multi month ‘trickle up’ tape action. It remains to be seen how the market closes today but this is clearly a sign of weakness and supply coming into the market. At 2:11pm the volume on the SPY ETF is close to 200 million shares. Today is likely going to be the heaviest volume on the SPY ETF for the last few months duration. The fact that it is down volume is an important clue about a possible change in character of the market.
The end of day volume will be interesting. I would prefer to see it at 300 million or greater on the SPY as an extra strength signal that we are really headed into more dramatic weakness.
Despite today’s decline, I still do not believe that we are at an ideal level for shorting the market yet. My basis for saying this is the apparent similarity between the current topping process and the April 2010 top. Even if we did not have the price action of April 2010 as a clue, usually the first hard down move right off the top of a very strong previous trend is met with an equally strong upwards reaction rally that is not able to exceed the high of the initial strong down move.
In the daily candlestick chart of the sp500 above we see the April 2010 topping process and the current possible topping process. Both processes appear to have a head and shoulders topping formation. Today’s decline in the sp500 looks like it could market the completion of the head formation and so I would expect a violent upwards reaction early next week perhaps into Wednesday (and likely on low volume) that would make for an ideal shorting opportunity. Assuming that occurs then it would be the top of the right shoulder formation and then lead to the real decline perhaps down to the horizontal dotted support range in the chart above near 1220. 1300 to 1220 is about a 6% decline which certainly seems plausible for this market given how overbought it has become. Whether more is in store after that remains to be seen on behavior at support levels.
I will be looking to go long either the TZA, SDS or EDZ sometime next week assuming we get my anticipated violent upwards reaction rally that will at first sight seem like total relief for the bulls, but in reality likely be offering bears fresh red meat for the taking.
I have not drawn in a support line on the RSI portion of the chart above but if one is drawn on the RSI from September 2010 to the November 2010 valley and then to the current RSI we can see that RSI is currently in a supportive channel range which supports my strong bounce theory next week for the better shorting opportunity.
A slightly alternative scenario is that the market will continue down slightly on Monday of next week to test the 1/20/2011 reversal hammer and then start to build its upward reaction from that level.
Ideally the market will be able to bounce up to 1296 range as a trigger for going short. It took 4 full trading days of upwards reaction after the decline on 4/27/2010 before the market fully fell apart with fast ease of movement.
The weekly candlestick chart is showing a very similar shooting star candlestick like the one that occurred two weeks before the mega drop in April 2010.
I am confused by your postings today. At 11:30am you say you bot short at 1293. At 3:50pm you say it is too early to short. Keep your postings coming, I consider you an indicator.
After close today (Fri Jan 28), the market is ONLY 1.5% from its high of 12,000!. The 10 moving average of Arms / Trin is only 1.27. The Arms / Trin reading for today was only a very very modest bearish 1.35. No panic whatsoever. Investor sentiment indicators are coming down from high bullish levels but still bullish. The 10 ma of Advance / Declines issues went from a string of 22 positive days to a very short string of 2 negative days to a very short string of 4 positive days, and at close today was back in negative territory. In my opinion, this is only the very very beginning. While your last post of today may turn out to be correct, I think you are being way “too cute”. Good luck. I am a bear looking for healthy correction of at least 10% which in the overall scheme of things is not a heck of a lot.
Earnings season is practically over, and Washington has not really solved any problems, other than print a lot of money which will create HUGE problems down the road. Washington is going to give us a lot of “gnashing of teeth” in the next months up to raising the debt ceiling + uncertain international events + market participants may start to anticipate the ending of POMO (which I think is June) and I believe there is not any chance of QE3 UNLESS there is a very significant and clear market swoon of much more than 10% – – than everyone may want the FED to keep going to avoid any further “pain”.
the “pug” EW blog after market closed today (Fri 28-Jan) expects a surprisingly very shallow correction – – only to SP1257! immediately he expects a rally to SP 1290 and than decline to SP1261 and all over in a couple wks. HE is very accurate, so would not want to bet against him. he says after this incredibly brief correction we head to SP1352 and onward and upward. unbelievable, but that is nature of this market.
The “too early to short” comment was only in reference to the expected upside reaction rally I am anticipating. I wanted get the short signal out there even if it means we go back up for a few days. But the initial short signal still stands. Am just trying to indicate that we should see a strong snap back up as the ideal timing to get short.
IMO, Major top for next few year is in place (for next two years at least). I agree with Tom that we may see rally back. But, IMO, it will be till 1290 on weak volume.
As for “major top”, I may revisit this statement if some major policy decisions are taken. However, even if 1301 top is broken again, it will not be by more than 5-6%.
1289 Short with 1312 stop loss will give substantial returns in years time…DYOR.
Wow you really think we are at such a significant top ? Interesting. I need to review my charts and see if I can come up with that type of scenario.
Hmm. Interesting. Everyone knows I went all in on the short side Friday the 21st! And further explained my position Wednesday the 26th.
Yes Geoff, it is another pat on my own back!
But how come, no comment on my Wednesday call?
You have to admit my calls have been spot on and not just this short call!!
JR – – – if your question was directed at “me”, there is a simple explanation. i read the comment posts but do not so much track who said what and when. i try to absorb the different points of view and make up my own mind. you are in for incredible “letdown” to hang your hat on what one person says – – – altho i have to say that from what i can tell the EW “pug” blogger is incredibly accurate and incredibly “reserved” – – no glaring headlines to suck the reader in and than no accuracy. he is lowkey and from what i can tell quite accurate.
in reference to your “call” JR, i do not recall it – – – however i do think you had indicated you were shorting LVS – – i tried that via puts and did not make anything – – – i will try to keep closer tabs on your calls JR – – but to do so with comments is a bit cumbersome
Nice Job JR, you deserve credit where credit is due. You should start writing some guest posts here at BestOnlineTrades, you have made some great calls.