I’ve been reading a lot of talk this morning about how there is no real chance that SPX will make any kind of high in the easily foreseeable future and that’s natural. This wave up from October 2011 has been so long and so powerful that it has left many with the strong impression that TA is valueless and that the only possible road to success is buying the dip and holding on at all costs. An extended wave 3 up will breed bullish complacency.
In all honesty that may well be the case for another two or three years, depending on the individual trader’s tolerance for pain, and over a timescale of decades the long side always wins through. However the current setup on equities looks VERY toppy, and the level of denial that I’ve been seeing from some quarters about this just beggars belief.
We have seen two consecutive bearish reversal candles in the last two days. A bearish reversal candle is one where a new high is made and then the day closes red. These candles are common enough, and if you look through the SPX chart you will see many of these both at tops and smaller reversals. Series of this type of candle are rare however. My friend Cobra found seven on SPY in the last 12 years that he posted last night, all of which resolved bearishly, and I’ve had a quick look this morning at past series of these on SPX.
I found three series on SPX since the start of 2004, though I’ll be going through in more detail over the next few days to see if I missed any. The first instance was a series of two in late December 2004 at the first high of a (failed) double top. There was an immediate 4.46% decline, then a marginal higher high, then a 7.56% decline. SPX daily BRC Series 2004/5:
The second instance, again a series of two was at the 2007 top, and I’m going to assume that people remember what happened after that one well enough that I don’t need to post the stats for it.
The third instance was a series of three at the first high of a double top in September 2014. There was an immediate 1.65% decline, then a marginal higher high, then a 9.83% decline into the October low last year. SPX daily BRC Series 2014:
These are not bull-friendly stats, and any candle aware traders are getting rightly cautious here. The stats suggest strongly that either the high yesterday was the short term high, and that a significant high has been made or is forming with minimal further upside. If we see a new all time high today, bulls really need to close it over the current highs to inspire any confidence at all.
On my optic run indices they all look toppy with the exception of TRAN, which made new lows in an ongoing decline that started last November. Scan 15min 3x SPX INDU TRAN charts:
NDX is forming a fairly rare right-angled broadening formation rather than a double top. These are 66% bearish as well of course. Scan 15min 3x NDX RUT NYA charts:
People ignore history at their peril, as the massive consensus expecting a big decline on bonds found out last year when there was a huge rally instead. The history was clear, as I pointed out at the time, and what happened before went ahead and happened again. History can’t tell you everything, and it can’t actually predict the future, but if an axe has been dropped on your foot three times in the past, and on each occasion that was swiftly followed by a visit to the hospital, then at the least that should make us have that outcome as our preferred scenario in the event that it ever happens again.
We’ll see how it goes today but if bulls can break through to new highs today and hold them, then they are beating the historical odds by a wide margin. It is much more likely that they will fail. I am now leaning strongly bearish today, and over the next few weeks. In the unlikely event that we see a new all time high today, I’ll be treating it as a strong selling opportunity.