Technical Recap of Mondays Session (by Drew)

Hello Slopers, Drew here with another technical update of the general equity markets. Lets examine the bearish action of Monday's session. Equities reversed early gains after a sharp morning sell off sent the Dow on a 230 point reversal for the session.

Well there you have it folks. We have witnessed a decisive breakout from the 1080-1100 neutral range. The distribution day count stands at five on the S&P, four on the NASDAQ.

I am posting two links that take you back to a couple of prior updates I posted on Portfolio Tilt, unfortunately they were compiled before I was able to put them on Slope. However, I think that with the benefit of hindsight, a great deal can be learned from reviewing them. I urge you all to thoroughly examine the charts in both of these analysis, they show a clear picture of the early warning signs of weakness coming out of this rally. I discuss important trading strategies on how to analyze and play critical market gaps, and I also mention the early initial signs of weakness that foreshadowed the bearish action we have been seeing recently.

The exhaustion gap (see prior update on S&P gaps) which I discussed on 10/13/09, and the bearish divergences highlighted earlier last week (see 10/20/09 on underlying technical weakness) appear to be in the early stages of a follow-through. We may see minor upside in the short-run, potentially a pullback to 1080, but it appears as though we are in the early stages on an intermediate correction.

I believe there is a high probability that (at a minimum) we ultimately test the lower support line of the ascending price channel. The bulls are likely to defend this area heavily though, the 50 day EMA is also located right in the vicinity of this range. I have highlighted the initial price channel to watch on the short-term charts, as well as the key trading range. I have also drawn the boundaries of a relatively small descending price channel, however the narrow range of this channel suggests there is a high likelihood it won't last very long.

 

Turning to the daily charts, as I mentioned earlier, the S&P 500 picked up its fifth distribution day in the recent period. We can see quite clearly how the character of the market changed in early October. The market rallied off of the 50 Day EMA on fairly weak, declining volume. I have stressed before the importance of price/volume confirmation. Typically, volume should move in the direction of the primary trend i.e. volume expansion as prices increase (overall volume declines during counter-trend corrections) in a primary bull market, and volume expansion as prices decrease (overall volume declines during counter-trend rallies) in a primary bear market.

Getting back to the early October action, we can see volume declining during the "50 Day EMA bounce" uptrend, and volume expansion as prices begin to roll over. This is not a healthy sign for the bulls, it is an early indication of a weakening primary trend. However, there has been no confirmation of a reversal in the primary trend, for now speculation will be limited to the argument for a correction of the primary trend.

 

Lastly, I suggest a look at the Dollar Index and Dow Transports. The former, has closed "to the point" on a major support/resistance level (76.00), and may be in the early stages of a counter-trend rally. The latter, has potentially put in a double top reversal, or the beginning of a wide rectangle trading range. In an update last week, I discussed the non-confirm on the Dow Transports. The Dow Jones Industrial Average reached a new intermediate high recently, while the Transports have exhibited stalling action, and have failed to confirm the new highs on the Dow. At the minimum, this should have short-term bearish implications. However, remember that any Dow Theory sell signal must always be confirmed by price.

As always, the long term trend.