The stock market fell by 3% since all-time high in February. Is more selling coming or are we going up again? Unfortunately, I think the uptrend is broken already and we will see more selling. Although tomorrow we may see a bounce from the oversold territory it looks like that the bounce will be sold off again.
This is a typical behavior of a market phase called distribution. And we should be careful about this because it means that the big players are selling their positions. Retail investors typically unaware of this phase are buying stocks while the big players are selling to them. The distribution phase may take a long time. In 2007 – 2008 this distribution phase took almost the whole year before the market crashed while everybody was optimistic and happy about the market and economy.
Although these days nobody seems to be happy about the economy it doesn’t mean that we are still safe and in an uptrend and that we haven’t already entered into a distribution phase. We may already be in one and yet not knowing about it. A good way to find whether we are in a distribution phase is to realize that the market struggles to make new highs and if it does it, it is heavily sold off immediately.
Sounds familiar? If you look at the market in the recent months, we have moved basically nowhere and all new highs were heavily sold off. A few days ago, we didn’t even make a new high and yet that spike was sold off too. If this continues, we are clearly in the topping pattern and thus we should expect more selling or even a major correction.
If we see a correction of 10% or even 15% then it will actually be a good thing for this bull market and we may see a continuation in the trend. If a deeper than 15% correction is about to hit us, then a bear market will come. But that is still too early to say where we are and what will happen.
What is my expectation for tomorrow?
Yesterday, I expected a bounce. But it didn’t happen and the market continued in selling. Later in the afternoon, we saw a small recovery when the market recovered from 2045 up to 2067. By the end of the session we dropped back and closed at 2056.
I think this weakness will continue tomorrow and in coming days. Since the market is oversold we may see a bounce tomorrow. I expect it to go all the way up to 2070. But then I expect it to be sold off again. If however we will see the market breaking up thru the 2070 level, we may actually go up to 2115 level. Which I believe will be sold off too.
This potential bounce is better seen from the following chart:
As you can see we broke below the trend and other supports (again) and the potential bounce would have two possible outcomes:
1) We bounce up to 2070
2) Or we break thru it back into the channel, which may be a good thing for this market.
Given the weakness of the market, I do not expect it to break up into the channel and if so, it will be sold off.
Two days ago I received a sell signal. That helped to reverse all our trades into bearish ones. If we get a bounce tomorrow, I do not expect a buy signal to occur yet. Thus I think that such bounce will be only a small bump up before a renewed selling comes back. If however a buy signal fires up, we will know that the market is bound for more upside.
Tomorrow, a GDP report comes out. There are two possible outcomes of it:
1) The report will be good – and investors will panic again out of a fear that FED may change its mind and raise rates earlier.
2) The report will be bad – and investors will panic too out of a fear that our economy is bad.
I would be surprised if the clowns on Wall Street would react positively, but it may happen.
We do not have any trades (except one of my bear call spread) expiring tomorrow and since next week I will be traveling, I will be taking off from my trading for the next week.
So be alert and happy trading!
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