Over a week ago, the S&P 500 found support at the horizontal line (2566 area) mentioned in the previous update and has since then climbed to a new all time high, although on anemic Volume readings. As a result of this steady advance, the stock market is now getting overbought and is due for a near term pull-back, early next week.
The S&P 500 has nearly reached an important resistance area, with RSI-2 at the same time entered it’s overbought zone and is also forming a bearish divergence compared to the early November market peak.
Nasdaq Comp. daily has reached an RSI-2 overbought extreme and is testing channel resistance.
Volatility fell to a multi-decade 8.56 low, intra-day Friday. But it managed to close above the important 9.1-9.4 support band and formed a ‘bullish’ Pin reversal bar, which could mean higher volatility (fear) ahead, which in turn could mean pressure on the stock market.
By zooming into the S&P 500 hourly chart, one can see another Ending Diagonal (Rising Wedge) likely developing, with the a-b-c part of this complex a-b-c-d-e pattern now nearly completed or even already so. So if the market turns south next week, this could be the wave d underway, with the lower wedge line as a typical target for this kind of pattern.
A fully completed Ending Diagonal could in fact terminate the one degree higher wave c from the August low and with it… even a larger degree wave e completion is not ruled out.
A few technical observations after this trading week:
As shown on this hourly chart, the S&P 500 broke out from the Rising Wedge pattern to the downside.
This also resulted in a breakout (daily closing basis) from the long standing bullish channel, which often is a strong technical signal of a change in the trend.
But RSI-2 is getting oversold, so i’d be first looking for a snap-back move towards the broken channel, which now acts as strong resistance instead. For Monday this is up at 2595 and for Tuesday, 2596 etc.
This could also fit with Volatility facing strong resistance, within the first half of the week.
Any daily close into the channel again, would indicate this week’s breakout was false and higher prices could be the outcome thereafter.
But if this stiff channel resistance area holds, a resumption of what could be a new bearish trend underway from Tuesday’s high, is likely.
Any bearish daily Pin bar (Shooting Star candlestick) or other reversal bar formed up against this resistance area, would indicate the market is heading lower from this zone.
If the market falls below horizontal support at 2066, (daily closing basis) it could open up for even more weakness, towards the first Fib. retracement support at 2528, which is calculated from the entire August – November advance.
Very overbought OEX weekly momentum turned bearish after this trading week, which increases the odds of mid term weakness coming. Any weekly close below weekly trendline support would confirm this.
I’ve updated monthly charts, with comments available.
The S&P 500 October trading month ended at 2575, beyond the +1/8th MML (Murrey Math Line) discussed in the previous long term update and right below the L3 DGL resistance area. It made an exact hit to this DGL intra-month, which caused the high for the month.
The next higher +2/8th MML resistance is at 2625. Any clear advance going beyond this area, would likely prove me wrong about a ‘throwover’ scenario and the long term Bull could be safe from the Bear, at least for the rest of the year and possibly into Spring next year. I’ll be back and cover more on why this is possible, in a future update.
This MML also roughly fits with the level where a major trendline convergence is observed on the S&P 500 monthly chart. So the question is, will the market test this area before Christmas?
Well, time will tell, it’s possible. The upcoming holiday shopping season could help lift the market even higher. The convergence of the two major trendlines could act as a strong magnet on prices, although a short or even mid term pullback is not ruled out first. But who knows for sure… it could go for it right away, despite overbought momentum these days.
The Dollar pushed higher in October, after forming a bullish Pin bar in September. It came close to testing the trendline mentioned in the previous long term update. So an even higher Dollar is looked for in November, towards trendline resistance.
For brief comments on more markets, see the monthly charts page.
Short term, the bullish channel on the S&P 500 daily chart is still intact after this trading week. But the market is ripe for some corrective work soon, which should lead to a downside breakout. When/if this happens, odds would be greater of a short & mid term top in place.
My reasoning behind this bearish view is that most indicators like daily NYSE A/D, NH-NL, daily & weekly Summation Index trend indicators, 21 EMA McClellan, Dow Transport and even Copper & Gold, continues to deteriorate, while the market is climbing to new highs.
When they all are in agreement like this (which is not common) and given the extent of these bearish divergences, this smells market weakness coming, which is also supported by weekly momentum being in a very overbought condition.
In addition, Volatility made a monthly close at the support area coming in from 2007, which could mean higher volatility (fear) for a part of November.
As for why this top apparently takes time to form, probably is a new Rising Wedge (Ending Diagonal) pattern now likely developing in the market, as better seen on this S&P 500 hourly chart.
Any downside breakout from it, would signal a completed pattern and with it, more price weakness thereafter. This Wedge & Channel breakout event is looked for this coming trading week.