"For next week I will be watching 1800 on the down side. If we close back below that I think it will increase selling pressure and slow down the dip buyers. The neck line of the potential head and shoulders top is in 1777-79 area. Breaking down below that activates that pattern and it seems likely that SPX will break the key 1775 level."
I was right about the first part. We dropped below 1800 early this morning and the dip buyers vanished and selling pressure increased. I also wrote in that same update
"Since the big gap up was a news induced move it is a bit hard to say if it is lasting or not. Quite often news induced moves are reversed. I think there is definitely a chance the market rethinks what that employment number might mean for taper. The FED said it was a close call in Sept. With the shutdown in progress at the Oct. meeting there was no way they would taper. But what about now. We have had some good data. I even hear leaks that a budget agreement is close in Washington. The FED has cover to begin to taper at the Dec. meeting if they truly want to. I don't know if it is just talk or not. I guess we will find out."
With the budget agreement firmly in place now the FED really has no reason not to taper if it wants to. I suspect that is what caused the selling today. If that is the case it may persist for a while. Here is the daily SPX chart.
SPX closed above the neck line area of the potential head and shoulder top pattern so we don't know yet if the pattern will be activated. The intermediate trend indicator flipped to down today. That needs confirmation with a lower close though. Volume increased a bit today marking another distribution day. Lets take a peak at the SPY 60 minute chart.
There were some really big red volume bars today. Clearly a distribution day. Will that continue? There were 165 new lows and only 53 new highs. That is a lot of new lows just 2 days off a closing high in SPX. That is the most new lows we have had since back in Aug. The breadth ended the day at 82% negative. That is pretty high for a day that started with a flat open. That is the most negative breadth since 8/15. That day started with a big gap down. I have been talking about the weak internals for what seems like forever. I think today those internals started kicking in. I expect more weakness to come.
Tops that lead to a bear market have two important points. The first point is when the smart money starts the distribution process. The second point is the final high. When I look at the market internals I believe point one happened in May when Bernanke mentioned taper. I think it is possible we are at point two. There was a lot of bear capitulation in Nov. We have extreme bullish sentiment with extremely weak market internals. That is what a lot of final highs look like. With a bubble valuation on the Russell2000 and rather rich valuation on many other indexes I am sure the next bear market will be another big crash. We want to identify the start of that bear as soon as possible. For now raising some cash and/or hedging long positions might be a wise move.
We closed near the low today, but still above key support. I don't know if bargain hunters will be out tomorrow or not. We had some serious selling, but we have not clearly broken down yet. This is that in between zone where it can be tricky. Unless it is an extremely strong bounce tomorrow I think we will be heading lower. A bounce might be a good time to sell/hedge/short.
Chart practice has been updated with DISCA the stock tonight.
http://traderbob58-chart-practice.blogspot.com/
Bob
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