Bearish Reversal at Resistance

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The chart above is SPY. It shows a pink horizontal line at the gap down from Oct 6 last year. That gap was never filled as the market crashed down and is only now recovering to those levels. However, there has been resistance over the last several sessions anytime price has tried to move into or above that window.

Today saw a move to new rally highs, followed by a wicked reversal in the last hour. On a short-term basis this makes the decline today larger and way more explosive than any since the beginning of the month, and so likely spells a short-term high. Again, on an intermediate term basis the trend is up, and the real nail in the coffin will only be a larger and faster decline than any since the March lows. Divergences have been growing the last couple months, so it would not be surprising to any technical analyst for the market to top around these levels.

I may get around to putting a video showing a bunch of charts as I like to do when I feel there are way too many charts to even think about putting in a post, and the market is showing signals of significant trend changes. As a short note, small option traders made a huge jump in bullish transactions relative to bearish ones last week, despite a relatively mild gain. Equity survey bullishness jumped dramatically in the AAII and the Consensus Inc surveys. The big four surveys are showing historically high bullish opinion collectively. Rydex traders have shown the tendency to buy the dips over the last week or so, which typically happens in clusters as a run up is topping. Also the equity put/call ratio has hit very low (too bullish) levels several times in the last week or so causing the short-term average to deviate significantly away from the intermediate term average which also typically happens at important highs.

This morning Sentimentrader.com discussed signs of a buying climax this week. We'll have to see how the week closes, but this would be the reverse concept of capitulation bottoms. In climax buying you see many stocks make new 52 week highs, but then reverse to close the week below the prior week's close. Today's bearish reversal after pushing to new highs certainly increases the likelihood of the climax scenario.

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This chart is the Nasdaq Composite. It made a classic shooting star at horizontal resistance today after pushing to new highs in the morning. There was a news influence due to the Beige Book report, but a candlestick is a candlestick. The other indexes didn't show really classic candles today, but the Russell 2000 made a bearish engulfing yesterday. While I don't have stats for anyone on this, today felt like a meaningful reversal to me, partly due to the fact of the wider range and volatility compared to the recent 2 and a half week stretch.

Bottom line is that a stop can clearly be placed above today's highs if shorting the indexes and there is a reasonable chance of reward of 2 or 3 times the risk even if only a similar 1-2 week pullback occurs from here. If it is something bigger, then the reward could be enormous compared to the risk of getting stopped out. While I didn't show it on the charts, there is only minor support below here in the form of common gaps until the lows earlier this month. So typically from a charting perspective you would see the market pull back and test those unfilled gap ups. Then wait to see if there is any legit bullish reversal at or above the next major support before considering a long side entry again (I'll call 1020 the next major support on the S&P 500- that's about 6% below current levels).