For the past few weeks I have been discussing the rotation in the Stock Indices and the importance of the 2065 area in the S&P to be more specific. I also have suggested the rotation over the last month looks a lot like distribution, which occurs around market tops. When distribution occurs, large money distributes shares slowly to small money. This occurs with larger volume. As the market declines, they step back from selling to allow the market to move back higher. Small money steps in to buy the dips and you get a rotation back up on low volume. That is certainly what has occurred and specifically today: large volume selloffs and low volume rallies.
I received a phone call from a friend who wanted to discuss the market development today. During the conversation, he told me a client of his informed him he took out a second mortgage on his house to invest in the stock market. This is certainly an indication of large (smart) money selling to small (dumb) money. While the Indices can certainly move to slight new highs, once again, the structure is not supporting it. The higher probability is always for rotation.
At the end of the day today, the Indices were extremely overbought and the day pattern is exhaustive in nature. The only positive for the move was Breadth. It was at an upper extreme. It is now at a point where some type of rotation down should occur. This is the same position the Indices were in when testing the lower extreme and in particular the 2065 area in the S&P a few days ago. I suggested there had to be some type of rotation up and how that developed would be important.
Now we find the Indices testing the upper extreme in an overbought condition. Therefore, there should be some type of rotation back down. How that develops will be extremely important.