Well, at least after the sixth gap up in the pattern the market did sell off a bit on Monday. Not exactly a crash down, but at least the gap got taken out. It is very rare to find five gap-ups without seeing one of them fail, which shows the froth in all its glory.
The market is out of control with regards to froth. That doesn't mean it can't go much higher over time, but you need to be aware of it for safety's sake. Not to let your guard down. So, the market sold a bit late on Monday, indicating maybe things won't be straight up in the days ahead, that we may actually get a much-needed pause in the action to allow some oscillators to unwind on those short-term charts.
It'll also be easy to think that we've topped out permanently since the move was so parabolic and that those types of moves usually end badly. While that may be the case this time, there's nothing to suggest on those key index daily charts that the end is upon the upside. The daily charts, I would think, would welcome a breather, but we shall see if the bears can follow through with a few gap downs that don't come back.
For now, we may have seen a short-term top, but whether it becomes something significant has yet to be seen, as the bears don't have anything technically on their side. They need to get to work quickly because if we fall without too much in terms of gaps or anything impulsive in nature, it won't take long before the bulls come back in. They look for any selling to run back into equities. The onus is on the bears. Get rocking, boys, or the bulls will inflict even more pain down the road!
There is a clear V formation on all the index charts. That's important, simply because the formation has the chance to pull back some and create a right shoulder in an inverse head-and-shoulders pattern that currently has the proper volume trends in place on both sides of the V. The measurement is up to 2200, which seems incredibly unlikely to me based on the froth and overbought oscillators, along with the terrible looking weekly and monthly charts. However, it is necessary to recognize the potential.
If the oscillators don't fall much as price drops, then the bears will be very unhappy while the bulls lick their chops. You want to watch with extreme care how price versus those oscillators react when things sell. Head-and-shoulder bearish patterns rarely work simply because markets are rarely bearish big picture. Probably less than 20% success ratio. Inverse patterns work more because markets are more bullish than bearish, with their success ratio at least at 50%. So, if we can sell some, we will watch very carefully the critical relationship between price and oscillators.
If you're a bull you actually want some selling here to give the market more energy for a move higher. A right shoulder would be what you are rooting for as it sets things up nicely. You want lighter volume in the right-side shoulder, and you want to see price hold critical support levels. We should go no lower than 199.00 on the SPY. A strong closing move below that level would start to negate the set-up, so the market bulls need to watch that. In the meantime, recognize the market risk, but also keep an eye on this potential bullish set-up.
Jack Steiman
