Pictured is the Daily chart of SPX500USD, the S&P 500 Index. Note we continue to make new all-time highs every week and remain near the mean-line (red) and price has been contained inside the 1 SD channel since the start of the summer. From a "Big Picture" view, the bullish trend remains intact...but there is reason for concern here. While price continues to grind higher, volume shows severe divergence, falling well below average. This indicates disinterest in the advertised higher prices. Sellers remain passive at this point, but that may very well change soon. Note in the past, such as in October and December of 2020, we saw a similar volume divergence that brought on a dip. However, in both of these cases, price was testing above the +1 SD line, so a pullback was "natural" and buyers showed up, at least at once, at the red mean line. This time, however, it's different. We are already trading at the mean line, and haven't tested above the +1 SD since May. This price action suggests the green trend channel is losing its significance. This is to be expected, especially after 2 perfect bounces off the bottom of the channel in the last 3 months.
I have drawn a potentially developing trend channel in white. I anticipate price will further develop in this channel by dropping ~5% to 4100. It could eventually continue below 4000 if buyers are not found as they were in May.
Alternatively, we may be working toward a parabolic up move into the blue zone on the chart, around 4700. This would require a volume spike, likely produced by a catalyst. Many believed that catalyst would be the infrastructure bill passing in the Senate. However, the market had a very muted response to the bill passage. An unanticipated bullish news event may bring on a short squeeze, but from the looks of the chart, the up-move in July was primarily the result of a short-squeeze. It would be unusual to see a short squeeze, a low-volume slow grind higher, and then a 2nd squeeze.
Therefore, a pullback seems likely here. If we were to spike severely and fail to hold higher prices, I'd expect a much more aggressive sell to follow. What this looks like to me is a run-of-the-mill long liquidation as ill-positioned retail trader bulls find more and more institutional sellers as price increases. Were I concerned that I was walking into a bear trap, waiting for a lower high around 4360 with a target around 4050 would be a more conservative way to take advantage of a correction.
I'm taking the more aggressive option, entering the short in the last hour of the trading day today 8/10/21, with the plan to cover at least 1/2 of the position at 4106 in case we get that strong response from dip buyers. I'll know this trade is not working if we get a weekly close above 4500 or any daily push above 4575. In that case, it's return to buy-the-dip mode.
I have drawn a potentially developing trend channel in white. I anticipate price will further develop in this channel by dropping ~5% to 4100. It could eventually continue below 4000 if buyers are not found as they were in May.
Alternatively, we may be working toward a parabolic up move into the blue zone on the chart, around 4700. This would require a volume spike, likely produced by a catalyst. Many believed that catalyst would be the infrastructure bill passing in the Senate. However, the market had a very muted response to the bill passage. An unanticipated bullish news event may bring on a short squeeze, but from the looks of the chart, the up-move in July was primarily the result of a short-squeeze. It would be unusual to see a short squeeze, a low-volume slow grind higher, and then a 2nd squeeze.
Therefore, a pullback seems likely here. If we were to spike severely and fail to hold higher prices, I'd expect a much more aggressive sell to follow. What this looks like to me is a run-of-the-mill long liquidation as ill-positioned retail trader bulls find more and more institutional sellers as price increases. Were I concerned that I was walking into a bear trap, waiting for a lower high around 4360 with a target around 4050 would be a more conservative way to take advantage of a correction.
I'm taking the more aggressive option, entering the short in the last hour of the trading day today 8/10/21, with the plan to cover at least 1/2 of the position at 4106 in case we get that strong response from dip buyers. I'll know this trade is not working if we get a weekly close above 4500 or any daily push above 4575. In that case, it's return to buy-the-dip mode.
Trade closed manually:
Closed this trade today when we couldn't trade under unchanged for a small loss. Bulls have awoken and are pressing for another squeeze. No reason to stay short in the face of danger. Summer conditions can create some unusual technical circumstances such as low volume melt up. Will re-visit idea after a structural break.
Update - I ended up re-entering this trade twice on a shorter timeframe on tests of the resistance zone, but have exited the short for now. Note on the attached annotated 4hr chart SPX sits at a pivotal decision point. Watch for a 4hr close below last week's low to signal further downside. Otherwise, I expect some form of a relieve rally, but it will likely be short-lived or very choppy unless it coincides with dovish central bank or positive political news. The bears have control of the market here, but this is not the time to enter short. the 4350-4415 area will be extremely important to watch if we re-visit it soon. Sellers need to remain active there to squash any chance of dip buyers traveling back into September's mid-point. Trading the current October range until acceptance and rejection is found below last week's lows or highs is the best strategy for now. This is a market that is waiting for more information, but offering many lucrative trading opportunities to those who are patient for the right entries and nimble taking profits.