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Wednesday, February 19, 2014

Daily update 2/19

The test of the all time high in SPX ended with a key reversal day.  Here is the daily chart.


We started with a gap down which the bulls came out to buy and drove SPX up to within 1 point of its all time high close.  Sellers took over and won the rest of the day.  That action means there was people just waiting for that high to be hit to sell.  You might recall at the low I mentioned how the futures retested a low by 1 tick and reversed sharply.  That meant there were buyers just waiting for that retest and that was very bullish.  The sharp rally back to the highs was the result.  We just had a very similar reaction in the opposite direction.  People did not wait to see if others were going to buy the market at the highs.  They just sold.  There were only 154 new highs which is extremely low when at all time highs.  Lets take a peek at the SPY 60 minute chart.


Look at the volume that came in today.  There were several large red bars.  SPY has a confirmed break of the 18 SMA, but is still above the 50.  This is the first distribution pattern we have seen since the low.  We ended the day with blue bars indicating price was below the lower Bollinger band.  It would not be surprising to see a bounce in the morning.  I also want to show the 195 minute chart tonight.


The two big red bars today confirm the shift to distribution the 60 minute chart shows.  That is not what bulls want to see when testing the high.

SPX testing the high before a pullback changes things considerably.  If this market turns down for real it just might keep going.  The Dow closed back below its 50 DMA without ever confirming the break above it.  The transports were already below their 50 and took another hit today.  The financials and small caps were also hit pretty hard.  Follow through is key.  I believe we will get that even if it is not tomorrow morning.  I suspect there will be plenty of people looking for strength to sell into. 

With both the Dow and the transports below their 50 DMAs the retest rally could be over.  If the Dow follows the script from the three peaks and a domed house pattern I showed last night we could be in for a rather significant move down.  Over the last two years none of the lows formed when the VIX crossed its weekly 200 SMA have been broken.  I think when that does happen it will unleash some significant selling.  If we head back down watch that early Feb. low as it was formed that way.  If we break that a cascade lower seems likely to happen. 

Everything seems to be consistent with a bull market top.  The over valuation and high margin debt make the risk of a major down move very high.  I think this is a good time to make portfolio adjustments to lower risk. 

Bob

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