Lets take a look at the inflection point that the market has reached during the first few days of the week and some of the technicals that have converged.
The first and foremost is the formation of the head & shoulder price pattern. Yesterday, the market sold off and broke below the H&S neckline. Prior to breaking the H&S pattern, the SP500 gave up the 1296 level last Friday. And after an agreement on the US debt ceiling was reached over the weekend, the SP500 opened with a large gap up on Monday and faded until the ISM number came out. The fade became a sell off that continued into Tuesday when the SP500 broke below the H&S neckline. Today, the sell off continued with a break below the long term supporting trendline that was formed between the March 2009 low to the present. Then buyers stepped in when the SP500 dipped below 1235 and rallied to close slightly above the supporting trendline with a bullish long wick hammer candle.
So will the market continue to rise or will it resume its drop? From the standpoint that the market will frustrate maximum number of participants, it will do both.
One scenario is the market will continue with this dead cat bounce for a few days to generate a bit of bullishness. Then as quickly as the bullish sentiments started to settle in, a new round of selling will trigger to take the market down to the 1225-1228 level and forces the long overdue capitulation before the seasonal summer rally/back to school rally starts.
This scenario is just one possibility...remember, the market will do what it will do, not what we want it to do! We trade base on what we see, not what we hope.
