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Wednesday, November 7, 2012

Daily update 11/7

Was that a break away gap to the downside or a capitulation bottom?  How you answered that question clearly shows you your market bias.  Instead of our personal market bias answering that question for us lets look at the charts and see what they say.  Here is the daily SPX chart.

To answer the question properly we need to really look at the last few weeks.  In Daily update 9/17 I wrote "I mentioned the high volume could be a short term volume climax.  The new high data indicates it was a buying stampede.  There is a risk that was some kind of upside capitulation event."  Here we are many weeks later and that high still has not been exceeded.  The volume bars since that high are big red bars dominant indicating distribution.  The 130 minute SPY chart shows that even better.

I don't know how anyone can make that into a bullish volume pattern.  Lets zoom in a little more to what happened today on the 30 minute chart.

The circled area is where the bulls stepped in to stop the initial decline.  When the market bounced I am sure many bulls were patting themselves on the back for doing a good job catching the low.  Then they woke up this morning and had the rug pulled out from under them.  The initial high volume into the low was caused by stops getting hit from all the longs in the circled area.  After the initial run of the stops some bulls decided this was an even better buying up and stepped in.  Notice we spent all afternoon testing the underside of the price action in the circled area.  Try as they might the bulls could not get price back above those lows.  In the last 30 minutes the market caved in on the heaviest volume bar of the day.  SPX ended the day at 1394 a lousy one point below our key 1395-1400 area I have been talking about for months. 

We spent weeks in distribution mode and now have broken down on heavy volume.  Does it make sense to you that the market would go through the trouble of a big distribution pattern only to have a one day capitulation bottom and start rallying again.  It doesn't to me.  I suspect today was a break away gap to the down side and the bear market I have been talking about is starting to pick up some steam.  The 200 SMA is at 1380.  I don't have any confidence in that holding with this price pattern though.  To get out of trouble SPX needs to close back above 1405.

Chart practice has been updated with CRM the stock today. 


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