Last week the markets finally turned their trends on the intermediate term time frame. That hadn’t happened since late summer of 2011. That usually ushers in a period of consolidation at best which, in this case, is the weekly charts. The worst case is that it is simply distribution rather than consolidation and the move off that break is lower, not higher. That’s the danger, and it's a danger that has to be monitored carefully if you are a longer term investor.
The short term setup is for a bounce, though. The break of multiple swing points on multiple time frames, as I explained here
, is usually is a high probability trade that carries to its target in a very fast manner. That is what we saw. The aftermath of such a move is a small bounce then more tests. That is the likely setup now. Here’s a chart of the S&P 500
(INDEXSP:.INX) visually showing the three key points.
Courtesy of stockcharts.com
The reversal bounce setup is triggered by two events that occurred on this chart, and all the indexes for that matter. First there were ABCD downs that triggered on the break of anchored support which is now anchored resistance. All of those finished off on Friday.
What also happened Friday was two-bar reversals with price moving under the prior day then closing back over it with lighter volume after a fast extended move lower. That calls for a bounce to relieve pressure and to allow the weaker hands to be replaced by the stronger on the bearish front.
The problem is that the bounce isn’t likely to carry all that far before it encounters what is now anchored resistance.
My expectation is that the first trip back to that area will be sold. If true, then the next push lower after that will be the key one for as it retraces lower that will put both the bulls and the bears at risk. Will the market break or hold? Will that subsequent retrace set up an ABCD up to get back to the $1435 level on the S&P 500 or will it instead lead to a weekly ABCD down that measures to almost $1300? You can see how the reward-to-risk lays out. I am sure the bears will try to make hay while the sun shines so use the coming bounce to reposition if you are not comfortable, for there is more risk now than there has been for quite some time.
It’s not time to abandon the bull, but it is time to question it and draw some lines in the sand.
No positions in stocks mentioned.