Signs of Weakness in the Markets

Signs of Weakness in the Markets

On Sunday, I published a post highlighting multiple signs of weakness that taken together indicated a down move was likely in the US Stock market as represented by the S&P 500 futures.  At that point, we saw these signs of weakness:

• overbought conditions on the weekly and monthly charts,
• a lack of demand at new all-time highs in the monthly, weekly an daily time frames,
• shortening of the thrust on the daily, and
• other indications a pullback was likely.

Levels of the likely down move were targeted.  You can review that post here: Sunday post seeing a pullback: Holiday Trading.

More Signs of Weakness

The result of that pullback thus far has been to develop further signs of weakness, including:

• breaking the daily uptrend channel,
• a large weekly bar forming (thus far down) with increased volume, and
• clear supply on the daily.

The market is also attempting to find support as it became oversold with the swift down move.

The key question on everyone’s mind is: will the market hold here and rally higher, or will it falter and drop farther?

Looking at this from a bullish perspective, we see that yesterday saw some buying off the day’s lows and today holding those lows and rallying almost to yesterday’s high.  And, we may rally higher in the next day or two.  But and this is a big but: look at the volume.

Going Deeper with Signs of Weakness

This is the largest volume we’ve seen since the downdraft into early October.  While there is no doubt buying in this volume, there is also a large amount of selling. That is clear from the Monday and Tuesday price action and volume.  Today also had pretty heavy volume compared to the last several weeks of daily volumes, with the exception of November 20 and 21, which days were also involved in a down move.  Astute traders will point out that today’s volume is less than the last couple of days and, therefore, is no demand.  That is true technically from a VSA standpoint, but I see a little in this day.  Today was also an inside day.  An inside day on relatively high volume after two days of downside usually isn’t constructive.  There was an effort to rally, but the result of all that volume kept price contained under yesterday’s high.

What’s Next?

I’ll need to see a test of all this volume to become interested in the upside.  And, that may happen.  Until it does, I’ll be looking for further signs of weakness on any rally back above the last couple of days’ highs.  A weak rally would set up a test of Monday’s sell-off.  This would look like a lower high following a lower low.

And, what would a test of all the volume look like?  It can take various forms, but the fundamental is that we revisit Tuesday’s lows on narrowed spread and low volume.