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Friday, July 27, 2012

Daily update 7/26

This is a good example of talking the market up.  I suspect the ECB is hoping that was enough to get them through August so they can take their usual vacation over there, LOL.  So what happens now?  Here is the daily SPX chart.

Price is extended with a blue bar.  The last two blue bars did cause a pullback.  We will see if it is any different this time or not.  We are back above the down trend line and at a new rally high.  There was very high volume the last two days.  There is some risk that this was a buying climax.  Those happen a lot more often at lows, but they do occasionally happen at highs.  Check out the 195 minute SPY chart.

Price is back up into the channel.  This move was so fast the 6 SMA is still below the 18 SMA.  You can see that was not the case on the other peaks.  We can see that this rally has not been tested even a little bit.  Until we get some pullback it is impossible to determine how strong a move really is.  At the last peak, I said I thought the market needed to consolidate near the highs in order to move higher.  Something it failed to do.  With price extended like this we have the same situation.  People are not going to stampede in right away.  Lets zoom in to the 60 minute chart.

We can see price is extremely extended from the 18 SMA.  The most likely course of action on Monday is a pullback from this extreme overbought condition.  A gap up is likely to be met with some profit taking.  Here is a look at the breadth situation.

We have positive crossovers on the 10 DMA breadth and volume charts.  However, they could turn back down very easily from this pattern.  The advancing breadth MA actually dropped slightly today.  The more important thing on the chart is the McClellan oscillator in the bottom panel.  This is the first new high with a reading below 100.  This lowers the odds considerably of a retest of this high should the market turn down again.  We also have a triple divergence in the last three highs.  This is a pattern very prone to reversals. 

They were real cheery on TV this afternoon.  Many proclaiming a significant break out.  I would be more inclined to agree if there was a fundamental reason behind the move.  However, that is not the case.  I am sure the market has now flushed out all the weak hand shorts.  Fast money shorts tend to cover when the market gets extended on the down side providing a lift.  When they are flushed out, the market is more at risk of a big move down.

This is clearly a high risk place to get long.  If you are already long I suggest you monitor your positions very closely because the current technical setup is prone to sharp reversals.  If this was a buying climax with a triple breadth divergence the market could fall away very fast.  Don't be caught by surprise.  If price can hold up for a few days we could eventually go higher.  Given that the fundamental backdrop is very poor it is pretty hard to assess the odds of that happening.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.