Taking A Look At The Bearish Case
On
Friday evening, I posted a number of charts for potential long trades. Index chart are currently trading in a 10 day range, and dip buyers have been active. On the other hand, we saw some distribution Friday morning, and some other factors indicate a top may be forming. Corey Rosenbloom points out that
the S&P is forming a "rounded arc" pattern, along with a negative breadth divergence.
Now, the oscillator is making new momentum lows, and the peaks in the oscillator are forming lower highs as price formed higher highs - that’s the sign of a classic non-confirmation which can be a bearish signal.
The fact that price is forming a clean ‘arc’ pattern also has bearish implications, given that arcs represent a gentle transfer from demand (buyers) to supply (sellers).
...The implication is quite bearish, given that the S&P 500 is hovering beneath critical resistance at the 1,007 level as well as the 38.2% major Fibonacci level at 1,014.
Should price break above 1,020 solidly, it would disconfirm (overrule) these divergences, but until that happens - and it could - we have to assume resistance will hold and that the divergences will play out as they have so many times in the past. This concept of ‘non-confirmation’ dates back to Dow Theory!
I trust Corey's charting abilities, so I'm raising my caution level going into next week. Let's also take a look at QQQQ, which is sitting under significant resistance.
A little over a week ago I mentioned that
restaurant stocks were looking weak, and posted some related charts. Many of these same names still look attractive for short trades. Cracks are beginning to show in other consumer areas as well. Consumer discretionary stocks have come far since the March low. In the end, however, cost cutting cannot be a long-term strategy for improved future earnings. At some point actual consumers need to start showing up.
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