Market Update - Short Trade Set-Up

Euro/USD Daily

The Euro/USD pair is at its daily upper bollinger band and below resistance in what could be a symmetrical or descending triangle.  The daily stochastics is back in overbought territory at a lower high.  The shorter term 2 hr chart is showing bearish divergence on the MACD.  So the set-up seems plausible here for a top with a technical triangle breakout chart target to slightly below the December lows in the Euro.  A move above the early April highs would negate this scenario.  Stops could be placed at that level if trading the triangle pattern for a downside move from here.

 

SPY Hourly

The S&P 500 is back to just under the unfilled gap at 139.80 which is also a harmonic resistance zone.  The hourly MACD and stochastics are overbought but may need to create some bearish divergence before a downtrend develops.  On an objective basis thus far, the rally off the April lows has taken over twice as long as the decline from the April highs.  So the downside still has the "power" on that basis.  It is reasonable to expect further declines to new corrective lows on that basis. 

 

Equity Put/Call Ratio

The equity put/call ratio is signaling a short-trade set-up here for a short to intermediate term downtrend.  The 10 day average dropped below the 63 day average as of yesterday.  This is occurring with the 63 day average having recently turned up indicating a possible intermediate downtrend.  A similar occurrence happened a year ago in early April as the market was moving into it high prior to a major correction.

The 252 day average is still moving higher ever so slightly which is indicative of a long term price downtrend typically.  This is despite a major rally in stocks.  So this may be a divergence of sorts with bearish long term implications.  But that remains to be seen.

Stock Update

4-17-12 Update

Probable short term rebound followed by downtrend continuation.

Wedge Line Broken on S&P 500

Click on Chart to Enlarge

See the notes on the chart above.  The break of the uptrend line is an initial warning that the uptrend may be complete.  A fast break of 1340 would be further indication that a high may be in place.

The NYSE, Russell 2000, and Dow 30 are all also under their corresponding trendlines. 

It may be wise to wait for a rebound for the stochastics to move back above 50 and then make a bearish cross before considering bearish trades.

Leg Up Topped in Stocks?

The declines today in widespread equity markets were significant from my point of view.  The price logic in some world markets and in the Russell 2000 have shifted to downward configuration on hourly and some daily time frames.

The Russell 2000 gapped down and opened below its upward trendline off the Oct 2011 lows.  Gap downs below trendlines are often significant where a simple move to or below a trendline may not be.

Also, both gold and oil are positioned on the daily chart with low closes below the lower bollinger band and the bollinger bands are expanding.  This configuration has the potential for sharp declines, though possibly short-lived.

I expect further correction in stocks from these levels.  I expect the US Dollar index to rise and the Euro to fall.  The upward move today in the dollar index provides some reasonable early confirmation of a completed correction of the upward trend.  A move above the Feb highs in the Dollar index within the next week would be excellent further confirmation of a new leg up in effect.

Near Possible Pattern Completion

Click on Chart to Enlarge

This is a chart of the Russell 200 cash index.  All major indexes are similar at this time, but this one is still below its 2011 high.  It appears that an upwards ABC pattern may be completing off the Oct 2011 low.  However, there is no confirmation of this yet.  See the chart above for initial signs of confirmation.

If the low at "4" is broken this week, that will be good confirmation that a significant high is in place.  That would also be a failed breakout of the May 2011 high on the Dow and S&P 500, which would continue to suggest a double top chart pattern could emerge.  If the entire "C" wave is retraced in less time than it took to form, that would be indication of a major high having taken place.

Extremely Low Volume - Probable Pullback Ahead

Both the NYSE and Nasdaq volume traded at extremely low volumes today.  The lowest in over 2 years excluding holiday low volume trade.  Actually the NYSE had 1 lower volume day a couple weeks on Feb 24th.  Low volume like that is not supportive of a market rally from everything I've studied.

I think it is safe to say that a successful breakout of the May 2011 high should see at least decent trading activity indicating that institutions are interested in buying the breakout.  Also, I think that looking at past highs like that, there will typically be a larger definitive candlestick to the upside by this time after exceeding that old high if the breakout was solid.  So, obviously anything can happen, but think about what this means. 

Also, the 50 day average volume is hovering basically at multi year lows.  Troughs in the volume are associated with rally tops.  And a multi year low in volume in the context of a double top potential chart pattern could portend a sharp decline.

I again suggest that traders steer clear of the long side.  The price has not broken decisively, but it seems to be just a matter of days.

Backtest of Wedge and Gap Filled

Click on Chart to Enlarge

The large gap down form Tuesday was filled across the board today on the indexes.  It will be interesting and maybe telling on how the market reacts tomorrow.  If a major decline is to ensue then I would expect the market to immediately sell off after the gap fill.

The Dow 30 and Russell 2000 both rallied back right to the lower trendline of the wedge today forming an ideal backtest at this point.  I don't think the market will be set up to accelerate down on a break of Tuesday's low yet.  Since the S&P 500 did not break the trendline yet, we may need to see it break and back test before the stage is set for the bottom to fall out.  So I think we may see some downside below this week's low followed by another brief rally attempt before a breakaway point to the downside.

Last week formed a picture perfect doji candlestick on the weekly cash Dow 30.  So that is additional evidence that a significant high may be forming.