Hourly S&P 500
On Thursday during after hours session, I warned that we would see a reversal in the markets. This is exactly what happened on Friday, as we gapped down and continued lower throughout the day. I had also warned of the prior low, one day before we actually hit the lowest point. Picking tops and bottoms in this sideways move was quite successful, but all good things must end. We had three strong peaks (higher highs) and we are heading down from the third peak. Eventually we will break out of this range. The declining volume during this sideways trend shows that many investors have retreated, stops and limits have been taken out and the market has not much resistance or support for a breakout.
We still haven’t hit the target forecast two weeks ago, which could potentially bring another bounce up to this level. Currently I favor a larger move down.
The break of the two blue trend-lines in the picture above would be very bearish. Many technicians will see this as a break of a rising wedge or bear flag. The ultimate test for the bearish argument will however be the break of the 1324 level as indicated above. The fibonacci extension measures the move from 1416 to 1267. We can use this to project potential targets for a bearish wave (see above), should the 1324 level break.
SPY Daily shows declining volume
The daily pattern suggests that we have a larger move ahead, but not all indicators show the appropriate divergence that calls for a more significant top.
SPY hourly indicators
The waves since the early july low have a corrective character (overlapping waves of 3 subwaves). The bullish volume is still sufficient to carry us through one more peak, but the Advance / Decline Volume shows that many stocks are not participating in the higher highs, which is also a bearish sign.
Even if we get one more wave up, the risk reward ratio for bulls is slim.
Semiconductors
Semiconductors are weak
Many financial blogs have turned their attention to the semiconductor sector. Wednesday’s strong bounce was seen as a potential bottoming sign for the sector. I don’t think so.
Semiconductors are usually leading the market and should not lag behind the S&P 500 if the next move was to the upside. I noted during the last two weekend updates that the Semiconductor sector was lagging and the most recent bounce hasn’t changed this by much. Semiconductors were again rejected by their falling trendline (see above), which killed the move right at the start. Until we overcome this line, I remain bearish.
Should semiconductors break out, the bearish move in the S&P 500 will indeed be contained and become nothing more than a final washout.
Ratio charts
Spy vs. TLT head and shoulders
The relative performance of Equities to Treasuries (above) has formed a bearish pattern, calling for more downside.
Financials relative performance break down
The relative performance of the financial sector is also in a bearish continuation pattern and has already broken out to test the most recent lows. This is a bearish signal for the overall market.
USA vs. World still strong, but correcting slightly
The US remains an outperformer. Momentum indicators do not show a divergence yet, but we can count 5 waves up, which could mean it will soon be the US leading the bearish wave. In Elliott Wave theory, advances occur in 5 waves, followed by a sideways overlapping correction.
Silver to Gold Ratio wants to break downtrend
The Silver / Gold ratio is still contained within its downward channel, but continues to show signs of deceleration. A breakout could be an early indication of a returning bulls.
Technology approaching a cycle low
Another positive sign for the markets is the trendline support of the technology sector relative performance. I have been tracking this indicator for a long time on this blog, and it now appears to move toward the first support (blue line). If this line can contain this indicator again, the under-performance of the technology sector will be over, which should lead the markets higher.
