It’s quite ridiculous when we have 2 days in a row of upside, retracing almost 61% of the recent fall, and people are starting to become bullish again. Nothing has changed. We are in a weakening rally which is retesting the old highs. Everything about it is consistent with painting a decent sell setup in the next 3 trading days. But not today. Let’s examine the evidence
We have the breakdown from a bearish rising wedge and we are retracing up into the shorting zone
Yesterday closed at the highs indicating the bulls are still in control, but the smaller range is evidence that the rally is weakening
Breadth does not like this rally at all. The odds are very high that this rally will run out of steam soon, the bearish setup is too good not to attract shorts. It is an incredibly breathtakingly strong bull market, so you would expect dip buyers to have a little more confidence than usual here.
Hold the line. I’ll let you know when there is a sell setup worth taking. The setup I really like today is Silver, I would take this long or short, but my preference is short, because I like to trade with the short term trend.
I would expect two sided choppy trading today with a smallish range. Today would be a particularly good day to take off, I wouldn’t touch it with a stick.
Equity markets are on cruise control, stopping out weak hand bears and driving up into resistance. The highest probability outcome remains unchanged, a push up a little higher before running out of steam and painting a short setup. Whether that short setup works or not will determine the fate of the markets for the next month or so. Because it will be such a critical inflection point it is a great opportunity to get short. Small risk, big reward, our sort of trade. Odds will only be 50/50, but who cares with a big payoff? You should be aware that in very strong trends the first retest is typically much deeper than you would normally expect, so the bus leaves empty. I think somewhere in the range of the original gap fill would be elegant, but that is pure mental masturbation and should probably be discarded.
Looking at the internals we can see that breadth is still high but weakening, ditto for TICK, aka Ghetto-zero. What that tells us is that the rally probably has a little more in it, but not much more than that. In other words it gives us confidence in the overall thesis that we are in a counter trend bounce gradually running out of steam.
I think Tim Knight has it right on the money this time, and I’m going to use his chart since it is dead on point
No shorting too early now, be patient.
I can tell you right from the start, this week is not going to offer any resolution at all for bulls or bears. Odds are overwhelming that it’s going to be a choppy rally and both sides will still be able to make their respective cases at the end of the week. Let’s have a look at the bullish case first. You can sum it up with this chart. A weekly hammer candle at support in any universe will get the dip buyers in, especially after the strong kickoff to the move on Friday.
Balanced against the bullish case is the breach of numerous long standing trendlines on all the indexes, the increase in volatility from a very low extreme, the in context weakness of the price action at every turn over the last two weeks.
What is most interesting to me is the most recent evidence. The strong upmove on Friday carried very little follow through. Buyer/seller imbalance was strong enough to gap the market up with no follow through, painting a close in the lower half of the range. This dramatically increases the odds for a down close today. Bottom line, the market should have been stronger yesterday
We have a 50% retrace on the original fall, which, with the weak price action yesterday afternoon, will bring early top picking bears to short.
More below the fold…
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