Broken Down?

In my last post, "Shaky Start", I stated there is a positive breadth divergence and that a rally could soon appear. Although the market continues to drop last Thursday and Friday, the positive divergence still has not dissipated but is getting close to be back in sync. As a good student of the market, I will wait until the divergence has disappeared to give up on the expectation of a dead cat rally. And if we look at the latest price action, things have not broken down as the market lead us to believe, at least not yet!

Looking at the big picture, the monthly price chart of the SP500, SPX is still confined in the rising price channel started from 2009. It is getting close to breaking below this price channel.

SPX (monthly):

(click on the chart to enlarge)


Zooming in on the weekly price chart and one can see there is a head & shoulder topping pattern being formed. Depends on where one draws the neckline (blue or red dash line), the approximate measured move can be anywhere between 1677.62 and 1575.83 for this head & shoulder.

SPX (weekly):



Finally, from the daily price chart, SPX is currently sitting on the lower trendline of the long term price channel that is in confluent with the 78.6% Fibonacci retracement. If SPX breaks below this trendline, then it could dip down to retest the September/August 2015 low for potential support. And if it does bounce off this trendline, then the potential resistance is in the 2020.86 and 2043.94 region, between the September 2015 FOMC announcement and the December 31, 2015 gap.

SPX (daily):



The near term selloff from this phase of the market might not be over yet, and no one knows when a dead cat bounce rally will show up. There are couple things one should be aware of, they are the New York Exchange Composite and the Dow Jones Transportation index have made a lower low from their respective all time high and there are market internals that do not support the recent low.

NYA:



DJT:



Just a reminder, one should not just look at the indexes purely based on the numbers, look underneath the surface and see what the market internals are telling you about the condition of the index. Look at the components for the DJT, see which and how many stocks are in the same condition as the index itself. Look at the extremities on the market breadth to see what is state of the internal market.

I’m not say this market is starting a new uptrend or it has made its low for this correction at this juncture, I’m just highlighting the facts and let you draw your own conclusion. As always, the market doesn't care about our opinions, it is its own arbiter and it will always do what it will do; the unexpected.

While the market is in transition, just remember this, “When in doubt, stay out!” Good luck and trade defensively. Cash is a position!