Looking back at one of my observations about the primary trend, I wanted to update one of the indicators I’ve been watching, namely volume. The basic idea is that volume expands in the direction of the main trend and contracts in the counter trend. Up until June 8th, volume had been expanding while the market climbed higher and contracted when the market fell. At this point, I see that trend has reversed.
Looking at the S&P 500 SPDR (SPY), the PowerShares QQQ Trust (QQQQ), and the SPDR DJ Industrial Average ETF (DIA) I can see that volume is no longer confirming a rising trend. Since June 8th, volume is contracting when the market rises and expanding when the market falls. This does not bode well for the uptrend.
Note; Click any chart to enlarge.
Another indicator I’m using to gauge the bearishness of this correction is Fibonacci retracements of the consecutive rallies since April 23rd. What I’m looking for is control of the playing field in favor of the bulls or the bears. If the bears maintain control, the consecutive rallies should fail to breach a retracement of 61.80%. Let’s talk about it in a language that many understand.
Since many readers may also be watching the World Cup, I’ll put Fibonacci retracement in the language of sports. Like a soccer game, the stock market is a constant struggle between the bear team and the bull team for control of the ball on the playing field. In terms of Fibonacci, I’m watching to see which team, the bulls or the bears, has control of the field. The idea for the winning team is to maintain constant offensive pressure to keep the soccer ball near the opposition’s goal. Chances are if the soccer ball is near the defense’s goal the majority of the game, then a goal will be made. So far, it continues to appear that the bears have had control of the soccer ball on the bulls’ half of the field; thereby maintaining constant offensive pressure on the bulls’ goal.
Rallies after each consecutive wave down in the market since April 23rd have failed to successfully move the soccer ball towards the bear’s goal. Essentially, we’ve failed to have a rally retrace any higher than 61.8% of the previous wave down. Should we breach 61.8%, the bulls have a higher probability of retracing 100% of the previous correction, and a shot at a bullish reversal in trend.
The first wave down was the April 23rd top to the May 7th closing low. The rally afterwards failed to breach any higher than the 61.8% zone.
The rally following the second wave down to the June 7th closing low failed to retrace higher than 61.8% as well.
The current rally, thus far, has reached the point that former rallies have been turned back. It’s at this point that the bears have reinitiated their offense to kick the ball back into the bulls’ defense.
Not only are we at Fibonacci resistance levels that have held against bullish rallies, but we’re also at trend resistance.
It’s logical that the market should take a breather here at 1080 after four consecutive positive days higher, at Fibonacci and trendline resistance. The real question is whether the earnings season will shake up the bulls to go on the offense to regain control of the soccer ball back towards the bears’ goal. The earnings season starts off with Alcoa today and Intel tomorrow. In addition, we have three major banks announcing later in the week. Their outlook for Q3 will most likely be the deciding factor on who will control the soccer ball for the next month.
