Despite yesterday’s major head fake price action, I have to conclude based on the follow up today that the bearish case is alive and well and that we still have a good shot at next week being another down week.
I went long the TZA again today after being blown out yesterday and this time I think I will have more staying power into the end of next week.
The daily MACD is just on the verge of a bearish downside crossover and while the MACD is somewhat lagging and does not guarantee huge downside price action, the indicator has never lied as long as I have been looking at it. The weekly MACD signal line still has not turned down hard yet to get it in a stance that suggests a crossover but all of that may change by the close of next week.
In addition the NYSE Summation Index has now turned down with conviction as of today and seems to be gaining some downside momentum. It suggests that market internals are getting slowly weaker. A top is a process, not a one day event.
If you look at the chart above of the Monthly SP500, you can see that the most recent October monthly price bar has a close that is situated near the very top of the price bar. We have a very important week next week as it is the last trading week of October and and week of prices that could potentially at least close the monthly October price bar near the bottom of the range.
For example a close near 1040 or 1030 would make the October monthly price bar a reversal bar and all but guarantee significant downside price action going into November. We don’t have to close near the 1030 range by Friday of next week, but in my opinion it will go a long way towards accelerating the bearish case.
It may seem unlikely for the market to be able to retrace most of October’s monthly price action, but remember that prices in general tend to decline faster than they rise because fear is a much stronger emotion than greed. So I would not at all be surprised at a close in the SP500 in the 1030 to 1050 range by the end of next week. The 1050 range would put us right on or very close to the up trendline from the March lows. That makes me think this level will hold or at least get some kind of bounce from there. The hard part is figuring out the nature of the price decline we are about to see. Will it be fast and furious or slow and labored? When the top was in 1975, the price decline was not a panic but it was almost 2 to 3 weeks of persistent price decline. Hard to say what this decline will look like until it actually gets rolling.
The character of the market is changing. The Amazon and Microsoft earnings news should have had the market up 150 to 200 DJIA points today. But ‘someone’ is selling the news now and we are getting distribution despite all the good news.
So if your a bear, hope for a 1030 to 1050 close by Friday of next week, the last week of October!