The market dropped below support today and a more bearish stance than before is appropriate. Unless this drop is negated quickly short entries are likely to produce better results. Today was a broad based decline that included all major sectors, and it took place with volume.
The decline came swiftly after the first 45 minutes of trading after an initial gain was recorded at the open. Some news from China that the government has instructed banks to reduce lending was interpreted as holding back growth on the one hand; and bowing to inflation fears on the other. The drop came when the Obama administration reported they are asking the US Congress to reduce US banks ability to leverage through several new regulations. This will restrict earnings potential. (And maybe future bailouts too!) So this has good and bad implications as well over time. What is more interesting is that most earnings reports have been beating their estimates, and when good news gets ignored it is a reason for concern. The market has dropped since earnings season began.
On a good note the market does really need a pullback though. The back and forth red bar, then green bar, then red bar is getting nowhere. The market was trying to hold on to the highs achieved, but not enough traders and investors were willing to buy more. A pullback may reestablish the areas of support and resistance so that there is a more fluid area to trade within for intraday and swing traders; and a pullback can jettison the weaker hands so that new highs can be achieved as stronger hands are willing to buy more at lower prices. Nothing moves in a straight line and a controlled quality pullback would be good at this point.
The slightly expanding range the market was beginning to form is more consistent with a “topping” price action than supportive of things going higher, and the red bars recently have had more volume in them than the green bars.
So where do we go from here now that some support has been broken and decisively? An article was published earlier this morning on determining the strength of support and resistance. With this information in mind it will be possible to consider this yourself.
The first thing to notice its the size and volume of the drop. Both are big relative to recent activity The second thing is to look for some prior consolidation that would indicate some support. Then evaluate that support for how strong it might be.
Some traders will look for Fibonacci lines, moving averages, and trend lines but we are under the most commonly used already. These work better when supported by prior trading consolidations anyway and it is the prior trading consolidation that holds the most actual support. What should appear alarming is that there is no strong prior trading consolidation close to where we closed which opens up the door a little wider for a further fall tomorrow. The tendency after big move like we had today is for the next day to experience a pause or inside day, but there are no guarantees.
For the bulls, there is good news but only in that the move down was quick and it also leaves a clear fluid path back up. There were no pauses and consolidations on the way down that it then further below. Those would have made it harder to climb back up as traders that bought at those levels would likely sell there to get their money back.
In the past these big red bars were quickly negated and a sharp reversal ensued. This big red bar was a bit bigger and holds more volume though. As always, we will see soon.
Trade with a plan.