Why We Think The Market Should Go Down Next Week

It's funny that you posted that chart- because I had drawn out that exact same ascending wedge early in the week and have been staring it for days.

The bottom of that thing never broke until the last 10 minutes of trading on Friday.

The S&P just kept getting crammed smaller and smaller into the tip of that thing- it was really reacting to the top and bottom of it, which was telling me there must be something to it.

When it broke to the downside I jumped into SDS and got a huge blazing fast run up.

With seconds to go before the close I was trying to decide whether to take the profits or play for a bigger move.

During my indescision, it corrected a bit and I ended up holding it into the close. Its since been green and red, closed AH in the red, but thats afterhours.

Who knows. I find this wedge interesting though. I might make out on a nice gap down on Monday or it could be yet another screwed trade for me.. this one, though seems kinda fun. I too, had figured we'd bump into 875 and pull back somewhat at least.

I wouldnt be suprised to see it fall out of the wedge and then pull a superman later and climb above it.

Not really sure on this one.. I definitely see the logic on both sides.. guess I'm hanging on from the short side..


But you turn on Fast Money and its all bull talk there
 
Quote from ShadowTrader_08:

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The Big Picture</h1><br>Good Morning, Traders. There is so much valuable information on our plate that if we waste anymore space on this introductory paragraph, we might run out of space trying to point out the hot stuff, so let's just get right to it.

There are numerous reasons why we believe the window period to initiate short positions begins this afternoon and ends Monday afternoon. Let's get right to the chart!

<img src="http://assets.shadowtrader.net/charts/090417SPY.gif" width="560" border="5" height="650">

Above is the daily chart of the S&P Dep Receipts (<B>SPY</b>). Recall that our target price has been 875 (red dotted line). Yesterday, the index came very close to touching that level by making a high of 870.35 which also touched the top trendline of the ascending wedge price pattern (top two magenta trendlines) that is a very powerful bearish set up if price breaks convincingly below the pattern's lower trendline.

Notice also that the <B>SPY</B> has been in a bullish swing pattern where every touch of the upper trendline has been a higher high (orange circles). Yesterday was also a higher high, however today's trading action will tell us if this higher high forms what's known as a <i>swing high</i> on today's chart. Remember, a swing high is simply a high that has two lower highs on either side of it. This is important to note because every single top in any market or stock must exhibit this same pattern before it starts heading downward. The target for that move would be the blue shaded square at the lower band of the current main channel.

We don't often allow ourselves to jump the gun into a position before the close of a price bar that supports our theory, but in this case if today's price has not broken above yesterday's and is looking weak going into the last couple of trading hours today, we may start to initiate some of our short positions in anticipation of a gap down on Monday. If however yesterdays high is overcome today, then 875 will be the next level of resistance and we will wait for Monday's trading to confirm a swing high.

Beyond the technical aspects, we'd also like to focus just a little bit on the fundamentals that may drive such a move as described above. The market is in the heat of earnings season, but enough key companies such as <b>GS</B>, <b>JPM</b>, <B>WFC</B>, <B>JNJ</B>, <B>RIMM</B> and <B>INTC</b> have already reported to give the market a good enough feel of where things stand economically. In our opinion, there is not any scheduled information that is going to be released next week that is going to be enough of a catalyst to drive prices higher. In other words, we think the good news is baked in with all the heavy hitters already having reported. Take for example, the mighty <B>GOOG</b>. The company reported earnings after the bell yesterday. The market rallied in anticipation of the news late in the session yesterday and reached the swing high we referenced on the <B>SPY</b> chart above. Upon the earnings release after hours, <B>GOOG</B> gapped up to 410 before deflating back to its closing price of 388 within 30 minutes. Last night, headlines read "Google Profit Beats Expectations; Shares Flat". This illustrates perfectly that there is not much new money left to push stocks above the 30% increase we have seen since early March.

This morning we get the last big bank out of the way as <B>C</B> reports earnings. Whatever the results, the scenario that is more likely to be taking place in the minds of traders around the world is not to initiate or add to long positions at this possible peak, but to tighten stops just below the ascending wedge on the chart above. Once these orders begin to trigger, a move lower could gain some serious momentum.

Additionally, today is options expiry and historically these days tend to be bullish and are followed by a bearish week. So even though the market seems due for a correction after 6 consecutive weeks higher, it might not begin to roll over today. But pay close attention to how the market acts in the last couple of hours today. If it is sideways today and remains non-committal into the close, it will strengthen our theory that the bulls would need some major catalyst to happen next week in order to keep this party going.

Our near term bias is switching to bearish now that we have touched 870. A failure to make a higher high today will confirm this for us. The best scenario would be a doji/inside day today which would indicate indecision and churning right in the sweet spot of the ascending wedge. This would increase odds of a gap down on Monday which we don't think the market would recover from.
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Hi, Shadow. I'll give my own take. We are near an overbought level, and, to put it to the S&P might be in that 875 range, but it really depends if we hit that earlier in the week rather than later. More strength can come in in the later part of the week if we do not advance a couple more percent from here. I'm eyeing QID after another couple percent rise in the NDX in the next couple days.

The way I read your analysis was as a best guess, and could not see any real quantitative method in it. I do agree, though, just a little bit more, and we'll be due for a pullback.
 
The VIX (fear indicator) has traded DOWN from its opening level for 13 straight days. I'll bet it's been a while since we've seen a streak that long on the VIX...

seems excessive to me.
 
Quote from NoBailOutBoy:

Come on guys, anything more than charts.

Maybe some logic, rationale or otherwise?
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Logic... what goes up, must come down.
Hedgies understand this. Fund managers understand this. If there is no big guvmnt news this weekend to prop markets... I might even say the guvmnt knows this. Sectors will be dumped to allow a nice retrace. If nothing else, it will take the edge off long term investors and technical traders alike, since we all expect it. I know the market does what we don't expect at times, so it may be odd timing or even after seemingly very good news. But odds are it will happen over a few days within next couple weeks.

Certain commodities or cash will hold big money perfectly safe (better than Oct and Nov) while market slips a bit. Then they can jump back in for even more percentage increases at cheaper pricing, or leave it for the ride because it is not expected to be a big correction.

More reasons... Forget options week since more important is... 1Q is done, big earnings week is done. Important increases to instill consumer confidence etc... is done, great 1Q. 2008 is dead and gone we can forget it. Trust the guvmnt. All that crap will likely raise this bloated market pig from a small retrace (820's-840's) to the 920's-940's. After that, who knows. Likely GM bankruptcy will be explained. It'll be good for a million reasons but later it will be dissected and OMG it wasn't so good after all. Also 2Q zombie financials will bring new and even less certain numbers to the table. Israel nukes Iran causing WW3. Again who knows.

I'm a noob, so don't listen to me, please. :p :cool:

Edit: For weekend, mostly cash, 20%L, 10%sh, sh added at EOD today. (illustrates confidence level in my crystal ball, lol)
 
Quote from NoDoji:

What reasons are there for the market to make any kind of significant drop next week? earnings






I am rather new to the markets and I wonder if the seasoned traders/investors here can provide insight into what sparks a significant retracement under conditions like these. [/QUOTE NoDoj, i dont know exactly how it works but with 3 or 4 of the biggest 6 or 7 houses gone,its a new game with fewer players controlling larger portions of the market,these house have free reign to move the market when all their counterparts are likely in agreement,the fact that everyone and their brother is saying sell,might be too tempting not to squeeze,, breakout either way is hemmed in with 837 and 897, not a big move for now
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Quote from rock34748:

Logic... what goes up, must come down.
Hedgies understand this. Fund managers understand this.
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As a quick lesson this is referred to as mean reversion, which is a bit more complex than the concept of gravity as you described.
 
Quote from TorontoTrader2:

The market "should" go down?

THE MARKET CAN REMAIN IRRATIONAL LONGER THAN YOU CAN REMAIN SOLVENT :(
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I guess it depends how long you "think" it's irrational before "you" change your mind.
 
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