Edit Sunday, November 18th: I’ve added a chart at the bottom of the post showing a potential ‘buy’ signal for $SPX using CCI.
Thursday’s spinning top indecision doji may have thrown the market into a consolidation phase, but one day of a rally is hardly enough evidence so what happens next Monday and Tuesday will be key. Consolidations in down trends will move sideways to up and can appear to be bottoms but we are several days away from getting fresh ‘buy’ signals so bottom fishers could regret jumping in here.
Here’s what the Bulls have going for them in the short term:
By the way I measure the markets, Tuesday and Wednesday qualify as selling climax events.
RSI on daily $SPX chart dropped to 27 on Tuesday and stayed there on Wednesday indicating an extremely oversold market. You will find readings in this area at every major bottom.
Pre-holiday trading usually comes with light volume and generally favors the upside.
Huge number of shorts at all levels above the market to squeeze.
AAPL may finally get some buying interest as holiday sales will certainly help their bottom line.
Here’s what the Bears have going for them:
All rally attempts since the mid-September highs have failed.
The last two consolidations produced Bear Flags and this consolidation is likely to do the same.
Daily charts won’t give legitimate ‘buy’ signals for several days and anything can happen before then.
Friday’s little rally was probably just a head fake/dead cat bounce and while some may have been buying the pro’s were probably selling into the pump.
$TRIN closed at 1.36 on Friday which is an incidence of Stealth Distribution and which means that all that glitters is not necessarily gold.
The European Union and Japan have slipped back into recession.
Uncertainty over capital gains increases will most likely lead to more selling and if not next week then the week after.
What the Bulls and the Bears need to be watching for next week and into the week after Thanksgiving:
A 90% up day with very good volume. We haven’t had a 90% up day since September 13th so if we get one next week it could mark a turning point in market sentiment. But it’s going to have to come on good volume to be credible and next week we will probably have light volume so such an event will have to be eyed with caution.
IBD type rally with a follow-through rally coming within 3-10 sessions. If markets were to give us a 90% up day early next week, then longs would need to watch for another big rally day on good volume to prove that the market wants to go higher. Should we get a big rally day next week, then the follow-through day would need to come in the week of Novmeber 26th otherwise it will lack the necessary volume and thus credibility.
AAPL. Has it bottomed for now? I have no idea why AAPL would bottom at any given price level but if buyers stream into this key stock, then the markets will go along for the ride.
Bulls and Bears will need to be hypervigilant next week as there is the potential for the markets to transition from its current phase into a new bullish phase. But we are not there yet and we will need several days of market activity before any conclusions can be drawn.
Daily chart of $SPX with all kinds of chicken scratchings highlighting the obvious.
Be careful and GL in the week ahead.
$SPX chart using CCI. Basically, once CCI rises above the dashed green line this method would generate a fresh ‘buy’ signal. From the mid-May low to the June low there was another such set up as there was a failure swing, aka positive divergence, between CCI and $SPX. In September there was another failure swing, aka negative divergence, between price action and $SPX indicating a potential top. We are now looking at a potential new ‘buy’ signal but it could easily be invalidated so even if CCI does give us a ‘buy’ signal early next week I think one needs to be cautious here as there are plenty of headwinds the markets will have to navigate before there is any real clarity in market direction.
Just something else to keep an eye on in the early days of the week ahead.