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Tuesday, February 18, 2014

Daily update 2/18

Very mixed day.  The Russell2000 was up over 1% while the transports were down over 1%.  Here is the daily SPX chart.

SPX traded in a narrow range today.  Breadth was strong and there were over 200 new highs.  Despite strong internals SPX could not stay above Friday's high.  The intraday price action suggests there was simply a lack of people willing to push price higher.  That usually gets resolved with a news event or a pullback deep enough to entice buyers again.  Lets zoom in to the SPY 60 minute chart.

Volume has clearly contracted on this rally.  Sometimes people get tentative on buying when you get close to the high so the market stalls.  I always hate this situation.  It could stall for a few days then blast off.  It could pullback a bit for a few days then lift off again.  It could also just top here short of the high and roll over.  What will it be this time?

I have no idea how this will play out.  We have a bunch of warning flags that we could have started a new bear market or at least a serious correction.  On this retrace rally we have both the Dow and the transports lagging along with a few other indexes.  The Jan. barometer was negative and widely publicized.  Sometimes that can turn out to be a self fulfilling prophecy.  The transports dropped back below their 50 DMA today.  The Dow is barely above its.  One down day and it could be back below it.  If that happens will anybody notice or not.  That could put a damper on buying.  Lets take a closer look at the Dow and the three peaks and a domed house idealized pattern.

Now the current Dow chart.

So far it still looks like it could be following the idealized pattern.  If that is the case it should be headed for a break of last June's low when this bounce ends.

So where does that leave us?  The only thing I know for sure is that until all the major indexes make new highs and stay there this looks like a bull market top.   In the short term we had a very strong rally.  However, final blow off moves and the start of a new leg up can look very similar.  Because of all the warning signs on the way down and the way the Dow and transports are lagging on the way up I believe this to be a final blow off move.  Detecting the end of that kind of move is tricky.  A close below today's low could start a pullback.  However, until SPX gets below its 50 DMA the bulls may rush in to buy the dip.  A pullback here does not rule out SPX still doing a full test of the all time high.  Like I said it can be tricky.  I think we need to take it one day at a time and see what happens.


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