Market Update: The Beginning of the Month: Good or Bad?

I thought today was important enough to give a quick update on the market.

Market Summary
The past couple of days we have seen a volatile continuation of the topping process of price level 1080 on the SPX. If this is a major top is yet to be seen, but it appears we have officially made a set of lower highs and lower lows which is a good start to the beginning of a downtrend. With a break of the 1039.47 price level, we have officially ruled out the alternative bullish scenario to see a near term upside break of the 1080 highs. A further pullback of some degree is in order.

Monday was a much expected rally on very low volume. The rally spilled into Tuesday reaching within pennies of the 61.8% retracement. It made it appear as if the dip-buyers had stepped in for the third time and were beginning to push this market to new highs. However like I had imagined, one of these dip-buying programs was going to fail and they were going to be punished. Sure enough they got smacked in the face Thursday with the Dow's first 200+ point drop in a long time.

Market Breadth

The past two days have seen significantly strong NYSE Down Volume confirming the downward price action. In addition we had a ~19:1 down day (Ratio of Down Volume to Up Volume). This certainly is further confirmation of the move lower.

As seen in the chart posted at the top, I'm still working on the Market Breadth indicator. One interesting development that I continue to track is the divergence that is created whenever we have doji type consolidation days. It seems the volume starts picking up in the direction of the future trend a few days early creating divergence in the indicator. This is definitely something I will continue to watch to see if I can point out when to expect a bounce.


Log vs Normal

The log scale looks like a clean break of the trend that has held this market up for this entire rally. However if you draw in normal scale, you see a different picture:

I pointed this out a few weeks ago, the discrepancies between the two charts, and I am still unsure which one to use. The log-scale has the argument that it has several significant touches of the trendline, while the normal scale is yet to be tested a third time. However if you notice the red trendline matches up perfectly with the normal scale, so I believe it is safe to say we shall see some type of support at this level. Remember 1014-1018 was once pretty significant resistance so it would make perfect sense to look there as the next possible level for a bounce.

The Beginning of the Month: Good or Bad?


In conclusion to this post I'd like to answer the title of the post. Is today's downside move suspect, or is it really the start to a bigger pullback? Obviously that is the million dollar question, however if we remember the last big drop in the market occurred on September 1st, 2009, exactly 1 month earlier from today. This day experienced nearly a 200 point drop in the Dow Jones and significant downside volume with a DVOL ratio of 15:1. Obviously you know what happened after this date.

 In addition, its very rare to find downside monthly candlesticks that don't have at least a couple ticks to form a tail on the upside. This would of course be created for this month if we fail to make a new high above today's open. We shall see if it occurs again, but let me pull a trick out the bullish analyst's bag (by only analyzing the past few years of data), and let me show you the last time this scenario HAS happened.