Look at the Dow Jones Transportation index, it has formed a double top and bounced off a support level that could turn out to be the neckline of a double head & shoulder formation. Until it can clear the October high of 4066.40, it will be considered in the process of forming a lower low/lower high down trend.
The Russell 2000 displays a similar price pattern as the DJT. If the RUT cannot take out the September high of 625.31 and break below the 550 support level, then that will be the first sign this rally is coming to an end as money is moving toward the big cap stocks such as the Dow 30 (flight to quality).
During the recent pull back, the DJI made a higher low and held above the supporting trend line, and it appears it has enough momentum to test the October high of 10119.47. If it clear this high, 10,500 will be the next target.
Unless the SP500 move above 1100 to get itself back in sync with the DJI, then it is another sign the market could have already made an internal top. During the recent pull back, the SP500 held the 1025 support and move back above the 50 SMA. In the last session, it was testing the resistance level near 1070. If it failed to push through this resistance level, the SP500 could be setting itself up with an H&S pattern.
A similar price pattern is also being formed by the Nasdaq 100. It held the 1650 support level and if it cannot take out the October high of 1780.83, a potential H&S is in the making.
Next week the market should give us a better idea on where it will go. Until some of those potential bearish price pattern formations are invalidated, I will not be a buyer. I will either be a cautious bear or move to the sideline until the picture is clear. The market is clearly telling us it is getting near the top if it is not already there, and giving us signs to be cautious.
