0.0.1 Simple SPY Trading System, Bearish Engulf (which means the current red candle completely engulfs the first one) is formed at a key resistance, so it is no doubt that the daily chart today is very bearish. The trading range formed during the last week, however, still holds so far, which means the market virtually goes nowhere. Tomorrow if the selling-off continues, we can see which direction of the trend is stronger according the my judgement to the trend strength -- whether 3 up days or 3 down days has greater magnitude -- and we will know where the Mr. Market will go.
There are the following three points for your attention:
- VIX ENV at the bottom. Note the green circles, VIX may break above ENV if the market dives tomorrow. Even if VIX doesn't, it will be overbought after further rally according to 2.0.0 Volatility Index - NYSE (Daily). In this case the market may bounce back on the day after tomorrow. I have mentioned a few times that there will be a tradable rebound after three down days in a row recently. If the market goes down tomorrow it will be three down days, so in some sense bulls shouldn't feel too depressed.
- NYADV at the very bottom of the chart. Note the red circles, NYADV will be overbought if the market rises tomorrow. Overbought NYADV is a accurate pattern and thus the probability of market going down on the day after tomorrow will be big. Therefore if the market rallies, bears should not feel nervous. In addition, the success rate of NYADV is higher than VIX ENV in term of timing -- what I mean is that VIX ENV may have a delay.
- 1.0.0 S&P 500 Large Cap Index (Daily), the candlestick pattern of the index daily chart is not a Bearish Engulf, then it doesn't seem that bearish (by no means it is not bearish). Let me re-emphasis that for candlestick pattern, one should always refer to the Index ETF chart. The open price of NYSE indices are often delayed, and the gap isn't clear on the chart and so the candlestick pattern analysis may be inaccurate. Today we have seen a typical pattern.
Conclusion: most likely the market will be stuck in a range this week, and both bulls and bears will have a chance to runaway or open new positions.
What will happen tomorrow then? I tend to be bearish although QQQQ may have a hope.
Let's take a look at QQQQ first.
1.1.6 PowerShares QQQ Trust (QQQQ Daily). I think the yellow region provides a strong support and should not break easily. Furthermore, both STO and RSI2 show positive divergence which is good.
1.1.8 PowerShares QQQ Trust (QQQQ 60 min). I agree that QQQQ is in a down price channel, and the channel has been validated by three points. However today it is right on the lower edge and might bounce back. Take notice of the positive divergence on MACD and RSI.
1.1.A PowerShares QQQ Trust (QQQQ 15 min), there is also positive divergence on MACD and RSI.
1.1.B QQQQ and VXN. You can see that VXN ENV might be break upward if QQQQ dives tomorrow, so at least it might bounce back the day after tomorrow. However be careful that the VIX/VXN signal itself is accurate but its timing is not.
Here are some negative factors to the tomorrow market.
2.0.0 Volatility Index - NYSE (Daily). It has broken the Bullish Falling Wedge today, which is one of the most bearish signals for bulls. In the short term, as aforementioned it might get overbought, however the breakout today probably means VIX will be rising for a while, which in turn means the down leg of the market will likely start to grow. Before the trading range in 0.0.1 is broken, the down leg will not be confirmed so you don't have to act in advance. By the way, take a look at this 2.0.2 Volatility Index 30-day/90-day Ratio, does it seem the top has passed?
3.1.0 US Dollar Index (Daily). US dollar rallied again, and this time the stock market didn't go up but US dollar got overbought. I still think this is a bearish rising wedge pattern (I moved the lines a bit). Moreover, the negative divergence on the chart are not to be ignored. All these mean US dollar may pull back at least in the short term, which is bearish to the stock market.
3.4.1 United States Oil Fund, LP (USO Daily), oversold. Note the positive divergence on MACD and RSI. With the possibility of US dollar pullback, oil may very likely bounce back.
Now take a look at the following chart and be reminded the anti-correlation between XLE (energy sector) and XLF (financial sector).
Then take a look at 5.2.0 Energy Select Sector SPDR (XLE Daily), it's oversold and right on the support. The volume looks like a capitulation to me. So the probability of rebound is quite high.
5.3.0 Financials Select Sector SPDR (XLF Daily). It is overbought and has rallied for five days. Note that other than the mad short squeeze after July 15th, it hasn't had a 5 up days in a row. The black candle has a very high probability of reversal. Also considered the factor of XLE, I think XLF will not be optimistic tomorrow.
5.1.0 Consumer Discretionary Select Sector SPDR (XLY Daily). XLY contains home builders and retailers, recently it often leads the rally. On the chart, however, it has been rejected the third time by the 200 days moving average. The Doji today is formed at the key resistance, which is likely a reversal.
By the way, many candlestick patterns, such as Bearish Engulf and Doji, will be more accurate at a key resistance. Of course they have to be confirmed on the next day, which is tomorrow.
So let's see how it goes tomorrow. God Bless America!