Wall Street is littered with the accounts of top callers who could not keep their opinion and trading positions separate. Nobody can call a top, somebody may get lucky on it, but it’s a silly exercise for many reasons, but keeping an eye on the macro picture can be extremely useful, especially if it can yield some tradable signals in terms of shifting risk/reward. The analog structure we have been following on the $DJIA for example has been golden.
Just last Friday the $SPX made new highs just in time for the $BABA IPO. What a nice and helpful, eh, coincidence. Since then things have been a tad rough as they say. Per the structures we’ve been watching nothing unusual has happened yet and this could simply be a run of the mill pullback. I’ve been very vocal about expecting something more in the weeks ahead and the technical indicators I follow still keep sending a larger corrective signal.
As it turns out the monthly close this coming week may well be a critical one. As small caps have been getting hammered it is the large cap heavy $OEX that has very much disconnected from even its most basic monthly moving averages (MAs). These disconnects usually don’t last and even this week’s pullback has failed to achieve a reconnect.
What this means principally is that markets could pull back even further and it would only constitute a touch of the same MAs it has reconnected with pretty much every singly month for the past few years.
No big deal right? Maybe not, yet given the set-up at the moment such a reconnect would likely produce one nasty topping candle. In fact, one could argue that such a candle structure is very much in play already:
On the monthly chart above one can see similar topping candles in past bull markets. Two of them resulted in massive tops that produced ultimate retirements to the lower Bollinger band (2000 & 2007). Three of them resulted in new highs after a touch or near touch of the middle Bollinger band.
To be clear: A move to the middle Bollinger band is completely consistent with 5 previous corrections following monthly topping candles. Such a correction would be consistent with the previous case I have outlined on the $WLSH. Now what happens after that (if it happens) is unknowable I would presume, but as you can see from the chart the outcomes could produce wildly divergent results. History suggests one should keep an open mind, especially as the month is not over yet 😉