Market Analysis

Watch Closely

Something significant has happened with US markets this week and whether you’re bullish or bearish I suggest: Watch closely.

Full disclosure: We’ve been approaching July from the sell side and I’ve been very transparent about this. In late June we identified the Sell Zone, I reiterated it on CNBC on July 5th, talking about the broadening wedge pattern and discussion the 2990-3050 zone on $SPX as key technical resistance. And throughout July I outlined technical problems with the rally on NorthmanTrader as well as in videos. Last week I talked about an imminent $VIXplosion, also on CNBC, when the $VIX was trading at 12, today it as hit 19.98 as of this writing.

That’s not to say I’m right or I told you so, it’s just an technical acknowledgement that so far the sell zone has proven to be worth a fade and the volatility pattern has kicked in.

But that’s not the important part.

The important part is what is happening with markets structurally from a technical perspective and I think everybody needs to pay attention to this.

Firstly, we made new highs in anticipation of easy money from the Fed, all of July investors kept pushing prices higher into the Fed meeting this week. $SPX 3028 was reached, right smack in the middle of the sell zone.

All of these buyers are currently under water, with all of July’s prices taken out in just 2 days:

Why is this potentially so significant? Because of where it happened and what the result is.

The where? Price perfectly tagged the broadening wedge we’ve been discussion and finally rejected from there:

Now this is no confirmation yet that the pattern target will hit, but it’s a warning sign especially in this context: Key indices are losing the highs from last year.

Example $DJIA:

Example $WLSH:

This places these index charts in imminent danger of having printed a fake breakout.

One of my technical criticisms of the rally and a favor in calling it a sell zone was internal weakness compared to previous highs.

The value line geometric index has been making lower highs with each new rally and again in July:

Structurally I’ve been pointing to the $VIX looking for another breakout, this breakout happened this week.

None of this precludes further rallies or confirms yet the validity of the larger structural sell case.

However what it does show is that the resistance zone outlined previously has been valid. As of this writing the low on $SPX has been 2914 (115 handles off the highs). Markets are now getting short term oversold, but as the previous highs from 2018 have now been broken to the downside they represent a mission critical task for bulls to recapture especially in context of the larger megaphone pattern I’ve outlined.

Failure to recapture these highs risks that the larger technical pattern gets triggered and I’ve outlined the other day: There’s a lot of open space below:

Indeed there is:

This is not about the day to day action, it’s about larger structural technical patterns and they are telling a story and this story needs to be watched closely in the days ahead.


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Categories: Market Analysis

16 replies »

  1. This last week was phenomenal. All the patience, all the sweat and pain was worth it. Weakness grew all along the sell zone. One who observed the ticks in everyday charts could notice that a sell-off was about to com. It just needed some reason.

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