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Dow Completes a Bearish Monthly Pattern

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Meanwhile, the futures have added an interesting question to Friday's projection.

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An interesting situation has developed during the holiday weekend. In the last update, I discussed that my preferred count for the S&P 500 (INDEXSP:.INX) was an expanded flat, which would decline to 1627-1630, then rally up to 1649-1652. On Friday, the market declined directly into that three-point target zone and reversed; then on Monday, while the cash market was closed, the E-mini S&P futures (ES) rallied straight up into the upside target zone (cash equivalent of 1649-1652), and promptly reversed. The chart below shows the futures action.


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This means that the futures may have done all the "work" and completed the pattern while the cash market took a holiday. This has left me a bit uncertain about whether to expect the cash market to also complete the pattern or not. On the chart below, the more bearish option is shown in blue.


Click to enlarge

It should be noted that the potential does exist for this to be a more meaningful bottom. The charts suggest a market that's teetering on the edge, and sustained trade below 1627 is likely to precipitate a strong sell-off -- however, as I noted on Friday, as long as bulls hold that zone, they could conceivably begin the larger wave B/ii rally from here.


Click to enlarge

On the monthly chart, the Dow Jones Industrial Average (INDEXDJX:.DJI) has completed a bearish engulfing pattern. This is traditionally a reversal signal.


Click to enlarge

In conclusion, it looks to me like bulls need to hold it here or risk an accelerating decline. We should see some degree of Friday's anticipated bounce for the near term. And depending on how that shapes up, we could conceivably begin the larger wave B/ii rally -- but for the intermediate term, the decline doesn't look finished. Trade safe.

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No positions in stocks mentioned.
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