The correction has begun. Or has it? The bears are certainly thumping on the blogsphere. Computers were running full speed last night spitting out short candidates. As near as I can tell the beige book was the catalyst that caused a perfect timing sell-off. A weak new high (SPX new high on lower 52 week new highs)was put in place which is always a dangerous time and a reason to tighten up stops (which apparently a lot of people did as it cascaded into selling).
Let’s just look how price is setup:
This past six trading days look very much like the top set in place starting September 16th. In fact they look pretty identical. Six sideways trading days ending a thrust which ran bumping up against new 52 week highs for the six days and then selling off. The 9/23 candle that started the pullback could actually be swapped with yesterday’s candle. They look the same! Both the September 23rd high and yesterday’s high have become third rail highs, that is they rallied up to make new highs and then closed back red (like they had touched the 3rd rail of the subway).
Here are 30 minute charts of the two days. Yesterday’s bar hit its new high earlier in the day and then sold off immediately trying to to hold-on but failing during the 3pm bar. The 9/23 bar rallied in the afternoon put its new high in and sold off during the afternoon. You can see from where the final bar sits that the sell of from top to bottom on both bars is about 1.75%.
So we have a good template to follow? You might ask. Yes, but for the same reason I have always been a bad test taker I am a little suspicious in here. It is all setup too good.
There are two things that bother me about this setup, the first is the obvious nature of it. I should just suspend and trade from the charts.. remember everyone is seeing the same thing this am. The second was that sudden nature of the selloff. The 9/23 high sold off immediately, 10/21 high plateaued for a while then sold off.
On 9/30 we had a similar sell off in size and nature only to rally back the full amount and then sell-off again.
My point being that the market can do just about anything it wants today. As of now the Initial Jobless claims is not out and that could cause us to rally. So as obvious as it seems it is still dangerous out there.
I will show you one more price chart and that is of Sept 24th, which was the day after the last 3rd high.
Many were expecting a gap down today, I thought we might possibly get a gap up based on overseas and morning econ data and earnings. Right now at 7:42 we are basically flat most earnings are in but economic news is yet to hit. So if we are going down and we do gap up you can expect that gap to fail based on the 9/24 behavior.
Other Indicators.
I spent a lot of time this morning on the price charts because they are setup in a perfect mimic pattern of 9/23. If some of our other indicators were not flashing sell I would be very suspicious but this selloff has been in the making for a few days now.
Zweig:
I have been writing since the third day of this current thrust that the power behind it has been weak. Our Zweig is now closer to the oversold condition than the overbought. This would indicate that we might not selloff as hard as we did on the last correction, maybe a 3-4% vs. that 4-5%.
52 Week New Highs:
Our new highs have been flashing top since we have been making market new highs without breaking out into new highs of 52-week-new-highs.
10 day Highs – Lows:
These have been steadily eroded showing weakening underpinnings to the market.
% of stock above their 40 DMA.
This graph is the number of NYSE stocks that are selling above their 40 day moving average. We have been using the crossing of its 19 day moving average to generate a sell signal and that happened with yesterday’s close.
Conclusion:
This market has been signaling top for few days now. Is it the 8 to 10% correction? I don’t see that. I was concerned about the Rut not making a new high before this interim correction but that happened yesterday. I would expect to pullback like the 9/23 pullback but we might surprise ourselves by having a shallower pullback than that. Maybe a percentage or so less. So instead of the 1057/1046 area we might only pullback to the 1068/1057 area. This is based on the Zweig already being close to oversold and the amount of cash ready to come in and buy this market. Tomorrow the indicators might tell another story but this is what I see for now.
I will let you know when things look more bullish. I do believe there are still new highs in our very near future.
See you in the markets.
Marlin aka: RedlionTrader
