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Where is $SPX heading next? I expect down and here is why.

I was wrong many times in predicting the direction of this market. For about five months the market headed nowhere. We are range bound between 2000 and 2100 level with a few over shots which are immediately sold off.

Although the overall long term bullish trend is intact, we are undergoing either a huge consolidation or a standard distribution.

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What happens if we are in a consolidation pattern? Well, in this case I mean a bullish consolidation pattern. We got into this pattern from a bullish rally, now consolidating heavily (meaning going nowhere) and once we break up thru this pattern we will see a new strong rally.

If we are in a distribution pattern then the bull trend is in trouble. If this really is a distribution pattern then we are at its very beginning and we may see some more up or down trading, but overall this may reverse the market and send it down.

Every rally occurred on a missing volume and was sold off on a heavy volume hard every time so far. Even today’s rebound from Friday’s selling was accompanied by absent volume. So I think, we may see more selling this week.

I try to set up my trending software so I can see the trend more clearly (short term trend since I trade weekly options against $SPX) and here is what I can see so far:

SPX trend 200 ticks

As you can see I have the charting software set to show swings based on ticks and Heiken Ashi candles. This set up helps me to see the trend more clearly. And what I see now is that we swung up and basically exhausted any momentum in that swing.

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The pivots indicate a sell signal, the trend shows red candles, and the MACD is in the extreme, pointing down, and fading. I do not see anything in that chart which would point to more upward buying. But, I may be wrong. Tomorrow will show what is about to happen. My expectation is DOWN however. And if not tomorrow, then later on this week.

Here is another view which makes me think we are not done with selling:

SPX expected move

As you can see, although we had nice strong rally today, it didn’t have enough power to reverse the short term bearish outlook – the candle in Heiken Ashi chart is still red (although weak), the PPS is still with a sell signal and we are on a downtrend slope. The only slightly positive is MACD which started pointing up again and changed into solid green histogram. That is the only light in the tunnel which may tell us that we may see a reversal and upward trend continuation.

If I am wrong and the market moves up tomorrow, this may be the point to go bullish again. But even if this happens, there are a few strong resistances, one at 2115 and the second one at 2120 which must be broken before we can call this a bull’s victory. Two attempts in the past already failed. Will the third be the charm?

Happy Trading tomorrow!

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