The US Stock market as measured by the S&P 500 e-Mini futures fell after weakness appeared at the recent highs. You can learn about the recent weakness and how it was detected from the last two blog posts discussing comparative weakness in the main US markets and the clear evidence of selling in recent days, among other signs of weakness.
We are now probably a bit oversold short term. (Click on the thumbnail image to the left to bring up the chart discussed here.) Any lower prices early next week will likely be contained around the 1830 to 1825 level (green rectangle). Any rally up will likely be halted around the 1845–1850 level (first middle red rectangle). An unlikely rally above that on Monday will find stiff resistance around the 1855–1860 level (upper red rectangle).
Last Monday, I posted that the Dow was lagging the other markets and was comparatively weak. This often flags a trend change, though it can take a short while to unfold. I mentioned to watch for weakness in the Nasdaq, looking for the Naz to break support. Well, that didn’t happen, but on Friday, the Naz failed to make a new high along with the other markets (see red arrow).
On that day and again today, weakness came into the S&Ps. This is designated by the ‘S’ labels on the chart. We see from both weekly and daily charts we are overbought. Given the comparative weakness in the Dow, non-confirmation in the Naz, being overbought, and evidence of supply entering the market, we should be expecting a reaction.
I would expect the reaction to at least run to the 1846 level and perhaps lower.
Although the S&Ps made new all-time highs last week, the Dow did not. Wyckoff talked extensively about comparative strength and comparative weakness. When related markets fail to make new highs together, you need to sit up and take notice. We saw this in January when the Nasdaq made new highs, but the S&Ps and Dow did not (see A on the chart). This comparative weakness in leading stocks lead the recent reaction. We have a similar situation today, only more obvious. Time to sit up, take notice and be wary. Very wary. Watch the Naz carefully. A close below support will not be constructive.
Yesterday, I noted that the 1832–28 level was likely to be strong support. The market came down to 1831.50 an hour after the US Open and set up a lovely Spring of the trading range that had developed in the overnight trading.
The day was range-bound, and this is the second day in a row we have had narrowed ranges. Watch for a strong move tomorrow.
In the last post for trading on Thursday, February 13 (click here to see that post), we suggested that that market could fall to 1805 to 1800 and then find support. The market fell to 1802.25, found support, and rallied to new monthly highs. We saw a continuation of that up move on Friday, to a high of 1838.75. So, what’s next?
Recent highs created on December 31, 2013 are 1846.50. Will the market run up and through this high, falter here and turn lower, or not even make an effort to run up and fall lower? This is the question many traders want to answer.
Actually, the answer to that question isn’t that important. What is important is knowing the levels at which the market is likely to turn.
Clearly, 1846.50 is a key resistance level. A push above this level indicates strength and a subsequent first retracement would be a buy opportunity. If the market fails here, however, then look for downside trades.
Given the SOT in prices over the last couple of days, the market may pull back a little first. Should the market pull back on Tuesday, 1832–28 is likely to be strong support. I would expect the market to find buyers there. If not here, then the next level would be 1824 to 1820. I will be looking for an intraday selling climax or shake out for a buy opportunity anywhere in this area as highlighted by the green band.
Longer term, my reading is for new, all-time highs.
Or is it just a pause?
As we await another winter nor’easter here in southern New England we are trying to stay warm and figure out what the likely next move of the market will be and how much snow we will get. The weather seems easier. It’s been very cold here lately. I awoke this morning to one degree above zero (that’s –17.22 Celsius). It’s what we call pretty nippy. The ground is covered with about a foot of snow from last week and we are expecting another foot of it tomorrow. That’s the easy part.
The market has been up for seven days in a row. That’s a pretty good run by market standards and shows the strength of the rally.
The was obvious narrowing of range in today’s market with pretty good volume. It suggests some supply is hitting the market. We see a little today selling on the 27,000 tick chart (on the down wave marked A–larger than any recent down wave, though not terribly substantial), but then the correction simply went sideways. So far, the supply has had little effect.
The key for tomorrow will be today’s high (1823.25). I’ll be watching this level closely tomorrow along with the snow. An intraday upthrust or a lower high should bring out greater supply. This will be best seen on the Weis Wave. If it does, watch for the market to make a run down to the 1805 to 1800 level, or lower. I see this as having the higher odds.
The market could also try to rally higher after pushing up and through yesterday’s high, or spend more time going sideways. All three of the scenarios outlined here are expected to be influenced by the supply seen to the left of the chart that occurred during December and January (red arrow).
The S&P futures had a good run up this morning.
Just before the US Open, the market tested the overnight lows (T) and took off. You can see the demand that came in off the US open, confirming the test (D1) and indicating the overnight high would break. The short pause here had light downside volume, opening the door for buyers to come in, and they did (D2). Buying extended some 20 points off the morning low before dying out. So far, the market is holding its gains.
Live Trading Tomorrow — Free Event
Tomorrow, I’ve been invited to join David Weis in a live trading session starting at 10:00 AM Eastern Time. It is being hosted by TradeGuider, and the event is free. I’ll be there for a couple of hours, and hopefully, we will have some good trading. You can register for the free event at this link: Free Live Trading: Friday, Feb. 6 at 10:00 AM ET
One of my favorite days to trade is the day after a trend day. Yesterday was a big trend day down. Sometimes, it is hard to get aboard a trend day. Yesterday, there were several opportunities to enter short, but even so, traders often report that trend days can be frustrating events. Trades are taken off too early and sometimes it looks as if the market is bottoming, but it doesn’t. Any aggressive trade taken long would get stopped out and lead to more frustration.
If you have difficulty with trend days, look forward to the next day. Days after trend days are usually very good trading days. The volatility remains high and the entries are typically pretty clear. Today’s chart of the S&P e-mini shows numerous setups–all based on the Wyckoff principles.
The market rallied during the Asian and European sessions, then began a trading range after the US open. About an hour into the US session, the S&Ps had a well-defined Spring. This ended in an UpThrust, which didn’t result in much. Another UT occurred right at the significant low from mid-December. More UTs and another Spring during the US afternoon session gave plenty of good trading.
Days after a trend day won’t give huge trades. The market tends to move quickly back and forth as traders work to re-establish equilibrium (fair value) after the large, trend day move. You have to be nimble, act decisively, and exit within a few points into intraday support or resistance. Nonetheless, the trading can be excellent.
Springs and UpThrusts are great trade setups after a trend day (and during trend days, too). For more information about these excellent trade setups, click these links:
Today was one of the better trading days. The day started with a continuation of yesterday afternoon’s down move. The lows were reached just before the US open where a rise in volume with little progress down followed by light downside volume indicated the downtrend was over (1) and a first long trade. Accumulation then became apparent along the 1765–6 level, which led to a trend. Dips back to the demand line set up trade entries.
A larger pullback ended in light downside volume (2). This set off a strong rally and the first pullback was a buy, as was the subsequent dip to the demand line.
Another larger pullback ended in a Spring (3). This drew in what looks like climactic volume, followed by another push up on lighter volume, indicating that the uptrend is over for the day (4).
Trading tends like this becomes straightforward when you know what market conditions to look for. These are detailed in Trading the Trend, a four-hour video tutorial on the sweet spot of trading: trend trading. You can learn more at this link: Trade the Trend
We’ve been discussing the likelihood of a significant pullback in Deep Practice for the past several weeks. The monthly chart of the S&P cash market shows an overbought position in the trend channel. Because it is occurring on the monthly chart, the odds of a significant move becomes more likely. The market sell-off that began last Thursday is the beginning of the monthly correction. Of course, the market may trade within a range up here, going sideways for a while, or trend lower. We will have to see how the data unfolds in the coming weeks.
The Thursday-Friday-Monday sell-off did do damage to the market, at least for the near term. Volume has picked up, indicating supply is definitely present. Buyers have not shown themselves to be very aggressive yet, although the market stopped falling yesterday on high volume, so there is an attempt to halt the down move. It is clear that the market is oversold near-term.
Any rally up is likely to find trouble overhead. That’s because of the heavy selling we have seen. Buyers would have to be willing to undertake significant buying to overcome that overhead selling, and typically that has lower odds of happening right off. We will generally see more backing and filling until selling has been taken out of the market before the market can rally much after a move like we have just experienced. Plus, the higher time frames indicate a larger pullback is likely.
For today, watch for evidence of selling to re-emerge around the 1800 to 1805 level, if the buyers take it up to that level. The first level of resistance comes at 1792–yesterday’s highs. Any further downside below yesterday’s low (1767) is likely to have difficulty around 1754.