(click on the chart to enlarge)
The first shakeout occurred shortly after the new closing high from the SP500. It spent five trading sessions forming a triangle pennant where the price coiled for an imminent break from this price pattern. As shown on the chart, the candle resulted from the 6/2/15 price action is a spinning top, an indecisive candle (labeled ‘a’ on the chart). This candle not only ended without giving any clues on the next directional move, it lured in the shorts when it broke down from the triangle price pattern, then it gave the shorts a false sense of comfort when the market took back the gains from the rally off the day’s low and closed slightly negative. In the next trading session, dip buyers came in at the beginning of the session and bid up the market to squeeze the shorts. The short covering rally made the price appears to have broken out of the triangle price pattern onto the upside. Soon after the shorts have covered, the rally fizzled and the session ended with only a modest gain and the price moved back into the triangle. This trading session price action formed a shooting star like candle (labeled ‘b’ on the chart), which typically indicates a lack of buyers to lift the bids. After the market has spent the last two trading sessions on trapping the shorts and generating a buy the dip rally to squeeze the shorts, the market then broken down from the price pattern and punished the dip buyers (labeled ‘c’ on the chart).
After three consecutive down days with sellers in full control (labeled ‘d’ on the chart), an exhaustion day arrived (labeled ‘e’ on the chart) where the selling was exhausted within the first hour of trading. Dip buyers then came in and bought the low that generated a short covering rally. Lacking renew selling that would resulted with a four consecutive down days for the market, buyers were prepared to buy on the next day (labeled ‘f’ on the chart).
Once again, the buying did not last long and when the buyers were exhausted, the sellers came back in and sold it down to print a shooting star candle (label ‘g’ on the chart). This shooting star candle gave the sellers the opportunity to form an evening star-like pattern. And the sellers did not disappoint. During the next two sessions, seller were busy selling until the price reached the 2072 level where the dip buyers stepped back in (label ‘I’ on the chart) just like they did last time on 6/9/15 and squeezed the shorts (label ‘e’ on previous chart).
After the 2072 level have been tested twice and held both times, the dip buyers came back into the market with a vengeance and took the SP500 back to near record level. But reality set back in, most of these rallies were accompanied by weak market breadth. Instead, the A/D line is much below the level when the SP500 made a new all time high on 5/21/15. Soon after the last dead cat bounce is done and the price actions formed the right shoulder of a head & shoulder price pattern, the market reverted to its prevailing direction, which is down.
And this leads me to present my scenario on where the market might be headed in this video.
Click here to view the video if you do not see a video player on your screen.
