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.
The link to today’s Briefing is below. I spent more time on the Stock Indices today because they are at a critical level. Price development and the internals are suggesting the potential for a large move to the downside. However, because there are short term divergences going into the 2065 area in the S&P, and it is an area of unfair value since the beginning of April, where rotation up has occurred, we could see rotation up tomorrow.
Friday the employment numbers are out. The Indices may pause tomorrow in rotation in anticipation of those numbers. If the S&P were to break through 2065 on good volume, it will open up a move down to test the 2030 – 2020 area. If it is unable to break through that area, the probabilities will have increased for another round of rotation back up. The Briefing outlines areas of resistance that will be important in the coming days.
Below is the link to today’s Briefing. When I work with clients, I try to demonstrate the importance of viewing the development and structure of any move in any market in multiple timeframes. While the Indices eliminated the series of lower highs I have been watching, the structure of the advance was very weak. Also, the intermarket divergences continue and the NASDAQ has some of the appearances of the year 2000, when comparing the futures with the composite.
Based on the above, I am very concerned over this market in the intermediate and longer term timeframe. The structure is not supporting a continuation of this rally, at least at this time. However, there are times when exuberance or psychology will outweigh structure and allow for price development to continue unabated, as it did in 2000………until it stops. Therefore, it is difficult to imagine the Indices being this close to all-time highs and not putting in at least slight new highs.
Be aware of any short term inter-market divergences that may exist in the near term, especially if the NASDAQ puts in a new high that is not confirmed by the S&P.
Price development when analyzed against the structure longer term is still showing warning signs.
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