Short term outlook on SPY

A few days ago I talked about why the market rally is unsustainable from a fundamental perspective. Here is a chart that shows why I believe the market should see a correction very soon.



At first glance the chart may seem messy but it has a lot of information and I have left ALL the major technical levels on the chart.

Firstly, pretty significant resistance area has been created in the 110.5-111 area which obviously we have not reached yet. If we were to break through this resistance, the next level is between 115-117. Honestly, I do not think this will happen without a correction. My belief is based on the other studies on the chart.

The time studies show that there is a very high probability that by 10/19 the uptrend should reverse. 10/19 is the strongest "time resistance" area on the chart. Even if that area is broken, the next very strong resistance area is 10/23-24. Either way, the time studies are indicating that there should be an end to the uptrend within the next week. Also, following a High-High time cycle, we should see a high between 16-25 days from the previous high. We are already 20 days since the previous high. Clearly, the time studies are indicating a reversal very soon.

Next, the Stochastic indicator has made a double bearish reversal in the overbought zone. This is a very bearish sign and is usually followed by a significant correction. However, if you look back on the above chart to 7/13 to 7/28, the Stoch made multiple bearish reversals and the correction never came. A counter point to this argument is that 7/13 to 7/28 was the middle of wave 1 while we are in wave 5 (see chart). This means that the bearish probabilities are much higher.

Finally, using the breadth studies that Market Mike created, you can see that within the last 2-3 days, the breadth has dropped 10 points. This is indeed very bearish because it means that the number of sellers is increasing significantly. This is NOT accompanied with lower volume (not shown), which gives this bearish indication some conviction.

If we do see a reversal, how far can we expect to go? According to the basic Fib studies, the first support area lies at 101.17. That is a drop of nearly 10%. Based on the high probabilities of a bearish reversal and such a low support level, I have traded a 108/117 2:1 put Back Ratio (see my post about Back ratios for clarification on this).

Here's to hoping the market crashes... Cheers!

- Wown
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