Finally there is gravity!
The SPX fell 11.74 points, DOW fell 73.4 points and Nasdaq fell 28.48 points on Friday. Market internals were bearish. The SPX finally forms a top. One of the well known facts of technical analysis is that prior resistance becomes support after being broken and prior support becomes resistance after being violated. Along the way up to a new 5 1/2 year high, the SPX has now multiple support levels.
The prior high of 1389 now becomes the short-term resistance. As you can see, today’s fall violated the secondary trendline (in orange). If there is a follow through in the down move on Monday, the 1369 level will provide the immediate support. Any move below 1369 on high volume, the 1389 resistance will become stronger.
What is to come will now depend on what happens on Monday. The SPX has been over extended and there will come a point where there is no more buyers. Those who chased after the price will realise that they bought for too high a price and start to get out. When a top forms, sellers start going short as they believe that the time has come for a reversal. Buyers who bought earlier will offload their long positions to reduce their losses or to lock in their profits. Over the past weeks, the market has plenty of buyers with long positions. When the price drops to a level where they can no longer bear with the pain, they will start selling. Is today the beginning of that happening? We will find out soon over the next few trading sessions.
It is not wise to start shorting the market at the moment. Remember, the overall bullish trend is still intact. One bad afternoon does not mean the beginning of a bear market. What today tells us is that the bulls are getting tired. The bears may take over, or it can go sideways for the moment. VIX is still very low. When VIX hits 13 or 14, the bears will have a better chance.
Have a great weekend!
Gary
