For the first time in several months, we saw signs of distribution in the markets crop up early this week as supply finally over came the incessant demand that has supported us during our current environment. I mentioned last week that although there were some signs beginning to emerge indicating a bearish divergence from the strong market we’ve been in for a couple of months now, the overall bullish character was still intact and these signs were probably hinting at a further need for consolidation rather than being indicative of an impending. The drop we had this week was not really that unexpected or even necessarily unhealthy from a technical perspective considering where we stand in the bigger picture. However, this week’s behavior was markedly out of character from what has been the norm recently and becomes yet another sign hinting that perhaps we are due for a more protracted period of consolidation after our most recent breakout.
Looking at a chart of the SPDRs S&P 500 etf (SPY) we can see just how out of character this week’s action was in relation to what we have experienced since the shift in behavior we experienced in early August. Not only was Tuesday’s ugly candle the biggest drop we’ve had in quite some time, but it also was the first downside breach of a near term trend line we’ve had in several months. Now that we’ve seen a steady drop in price since we formed the shooting star candle a couple of weeks ago on a failed attempt to extend our massive breakout, there are some arguments beginning to pop up of an impending top being formed. While there is some merit to the possibility that this could end up being the eventual highs of the year, tops do not happen suddenly without some extreme market catalyst occurring and the more likely scenario is that we are still coming to terms with the fact that we are currently sitting at multi-year highs. However, while the action has been a bit weak recently, consider that it took nine days of selling before the bears were able to overcome just one massive candle of buying and that we are currently hovering around our rising 20 day moving average and still clearly above the highs we formed in the early part of the year.
As it stands right now, we are either in the process of forming a pivot low around this moving average, or if we stall out here likely forming a short term bearish flag as we head down towards the major support around $142. As long as we hold above this level which coincidentally also lines up with the neckline from the head and shoulders top we formed after failing at those highs which as I have stated before has served as an excellent line of demarcation separating the different phases of action we’ve seen this year, I would consider our new rally to still be intact from a technical perspective. On the other side of the coin, the shooting star around $148 now becomes the key factor that the bulls need to overcome in order to continue our rally and put all this talk of impending top to rest. This level will likely need some time to be overcome and do not be surprised if we stall out around it yet again if we can get back to it in the near term. We should be close to a bounce and a retest of that area, and traders should be searching for charts that are similarly finding support after a strong breakout and getting ready for a retest of their highs as well.
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