Friday, October 24, 2014

SPX, INDU, COMPQ and SPX:TLT: The First Signs of at least a Minor Top

In the last update, I discussed at length why I haven't been trading much since SPX 1820, and we examined the bull and bear cases via BKX and COMPQ.  Nothing has changed in the intermediate picture, but near-term, we have the potential makings of at least a minor top.  We'll start with the SPX 1-minute chart to show why I say that:

Regarding the chart above, I should also note that in the event of the black expanded flat, Target 2 would no longer be considered "more probable," and would be given equal odds.

COMPQ reached, almost perfectly, the measured move target shown on Wednesday (represented by the height of the green measuring boxes), which also lined up with the second noted resistance level (blue dashed lines).

From an intermediate perspective, INDU's chart is interesting, and shows this market has tagged an intermediate confluence.  These adds another "reason" why a top (minor or otherwise) could form here:

Interestingly, SPX has (thus far, anyway) not quite reached its broken trend line.  So far, it's fallen about 10-12 points shy of that line:  (continued, next page)

The two-hour chart shows a close-up of that same long-term trend line, and also shows that SPX has reached its second potential inflection point (green circle).  It's interesting how SPX responded to the first inflection zone I'd noted:  It hit the top of that zone, and then dropped straight to almost the exact bottom of the zone -- where it found support for another run at the top, then broke through on that second attempt.

Here's a chart I haven't updated in a few months, the SPX:TLT ratio chart.  Last time I published this, I noted that this ratio appeared to be stuck in a triangle -- that pattern has since played out in favor of the (then) bear expectation.  Note that, similar to the equities charts above, this ratio is back-testing a broken support zone, which could offer at least some degree of resistance.  If this zone does offer resistance, then that will manifest as strength in TLT, weakness in SPX, or both.

In conclusion, multiple markets have reached, or are very close to, theoretical resistance zones.  This suggests that at least a near-term correction may be looming for equities, either immediately or in the very near future.  How that correction develops may give us our next clues for the intermediate outlook on equities (assuming, of course, that said correction develops in the first place!  Don't want to put the cart too far out in front of the horse...).  In any case, this is the first thing I've seen in a while that looks at least vaguely actionable for nimble bears.  Bulls, of course, already know what their trade is here.  Have a great weekend, and trade safe.

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