Stock Market in Potentially Explosive Position

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See the chart for notes.  The Dow (and other indexes) is in a potentially explosive downside position.  Using a "stop" order to short on a break below last week's low may be the best strategy in this case.  A stop would be placed above the highs of the rebound off of last week's low.

Of note, but not shown here, there has been a dearth of "smart money" buying occurring over the last week or two compared to the buying that occurred at the June low.  So with the market at obvious trendline/chart pattern support, the smart money is not buying aggressively.  This is suggestive to me that a downside continuation will occur, and probably sooner rather than later.  The next obvious chart support is the June low if a sharp breakdown does occur.

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If the SPY is at a new corrective low by Tuesday afternoon, that keeps the shorter-term price logic clearly down.  So again, entering short (if triggered by Tuesday) on a stop below last week's lows would be my preferred strategy.

The hourly MACD crossed into a sell Friday afternoon.  Since the Sept high, these signals have been good indications of renewed selling and have not developed divergence prior to price move to new lows.  That is typical behavior of a trending type move.  So again, a quick move to new lows would be further indication of a predominant downward price psychology.

While the markets may seem oversold, it is important to consider multiple time frames.  While the daily time frame reading are nearing typical oversold readings, intermediate sentiment readings are not yet at a point that screams of an imminent rebound.  And weekly, monthly, and quarterly indicators all are overbought and turning down.  The weekly stochastics and MACD indicators are not oversold at this point. In fact the weekly MACD has just crosssed down after a bearish divergence, which is typical indication of a larger degree trend change and impending sizable move.  So understand that there is plenty of room to the downside here for prices.

AAPL Close To Trendline and 50 Day MA Break

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This is a daily chart of AAPL.  There are several points of note here.  It is in a probable set-up for a break of its up trendline, which would likely lead to break of the recent base breakout at $620.  I have noted before that a failure of that breakout to hold is potentially longer term bearish.

First, look at the daily MACD.  It is showing bearish divergence between the spring highs and the current high.  The weekly chart also shows a sharp bearish divergence between those points.  Also, there is bearish divergence within the end of the recent leg up between August and Sept.  So there is a multiple time frame bearish divergence indicating waning momentum on a large scale.  I have already noted the volume divergence in a recent video.  The volume divergence is also present on multiple time frames.

Secondly, look at the pink uptrend line.  It has already been touched 4 times for support.  If it is broken that could signal a correction of the major uptrend for the last year.

Third, look at the 50 day moving average.  I have noted this type of occurrence before, but I will review it again as I believe it is an advanced chart reading concept.  At key moving averages like the 50 and 200 day MA's I believe program trading often leads to support and near immediate reversals when price touches them.  In a stable uptrend price will typically not come back down below the low of the moving average test area.  Also, the rebound off the moving average will often be strong with a gap up and increased volume.  However, as a trend is beginning to weaken, price may test the moving average and lead to an apparent reversal as program trading comes into the stock.  However, the rebound is often relatively weak compared to prior rebounds, and volume is often lower.  Then, if price fails to hold the 50 day average or the low of the recent test of the average, it can create a "breakaway" type point where the program trading support is gone and price falls rapidly.

So that is possible here as AAPL recently tested the 50 day MA and reversed off it creating a reversal candlestick.  However, the initial rebound has been relatively weak.  And price has now come back down to the 50 day MA and is threatening to close below it and below the low of the recent reversal bar.  Combined with the uptrend line in the same area, I think a close below the 10/2/12 low could lead to a breakaway move to the downside taking AAPL down probably to the recent base low around $520-530.

If that occurs, then it is obvious that the broad market is likely to experience a substantial correction as well.  So keep AAPL on your radar on Monday.