Well what do you know? When the markets closed on Thursday, we had witnessed a day when not a single market tipped its hand, steadfastly refusing to give traders any idea which way it would be headed on Monday morning after a 3 day weekend. In the last pub I had mentioned the air pockets that lie just beneath all markets and that there were H&S patterns showing up in large numbers seemingly everywhere. Add to the mix the fact that market internals were in such an incredible negative divergence with the equities markets and we suddenly find ourselves looking at the possibility of seeing the markets drop into the abyss. Let's get started with a few charts that I brought from the last pub. Let me stick 'em up on the wall here and let's get started.
First up is a chart of IWM which I have full confidence in as being one of the biggest, fattest canaries in the entire world of western equities markets. Small caps lead, (in both directions) and when the markets closed on Thursday the Russell 2000 was poised right at the edge of the cliff.
|Futures have shown what lies in store next week. Click here for a live and updating version with a couple of indicators. Click here for a 'print' version for those not subscribed to StockCharts.|
|Pick anything you like and enjoy the rest of the week. We never run out of drinks in here.|
And in order to avoid looking like a complete idiot on Monday morning, here's a screenshot I took as evidence of what futures looked like on Friday when they closed. Again, this is the Russell 2000:
|Futures on the Russell 2000 as they appeared at the close of futures trading on Friday, April 6th.|
Next up we take a look at a classic diamond pattern that formed in the S&P 500. It too provides a measured move opportunity that gives us a reasonable target. Keep in mind that the 'measured move' possibility comes from the white arrows and not from the diamond. In no way do I pretend that I "knew" markets would be headed lower based on the diamond because realistically they could end up being a 'reversal' pattern just as easily. All I was confident about was that "if" the markets headed lower, it would more than likely be with a vengeance.
|The potential target of approx. 1366 by Wednesday comes from the white arrows, not from the diamond. Click here for an updating 'print' version.|
Last week I was speculating on the fact that the first two waves down from the recent high were of equal length, that the next move lower (the one that we're apparently going to see starting Monday) would be an extended 5th. I still think that's the case. So I expect the entire move beneath the "neckline' or whatever you prefer to call it will be a 5 wave structure. If that's the case, the target shown will probably be exceeded judging by the length of this first candle alone that's apparently going to show up first thing on Monday. That measured move as shown is a 'minimum' and not necessarily the full extent of the decline.
With the chart below I'd like to demonstrate why I focus on the market internals data as much as I do. This kind of information is crucial to understanding whether or not a sustained rally (or decline) is real or not. Many times it is very real, with a head of steam that is surely not going to end anytime soon. At other times, it's as phony as a 3 dollar bill. Lately it has more or less been doing the old Wylie Coyote trick. Sooner or later a market has to either pull back or crumble completely when it becomes apparent that fewer and fewer horses are pulling the old stock wagon up the hill. More often than not it's just a pullback. When we're in a bull cycle that is, as has been the case for the past 37 months.
Here's what has been happening with the number of stocks that are considered "bullish" as determined by their point and figure charts, aka the Bullish Percentage. The chart looks kind of "busy" but really, it's the annotations that best describe the more poignant things to be watching for. In order to make it "less busy", I've removed the S&P 500 as an overlay and have placed it in a separate panel below. I've also provided a link below the chart to the version which shows the both of them overlaid against one another:
|Bullish Percentage betrays undeniable market weakness when it occurs. Click here for a version where the S&P 500 is moved up to become an overlay. It might look a bit "busier' but it's the best way to actually appreciate the divergences. If you left click either chart in order to bring up the "lightbox" you can then toggle between the two versions.|