Last week, I mentioned the Dow (Dow Jones Industrial Average) was trading within a bearish wedge and could drop 1000 points. It is one third of the way to that 11,200 target, if that pattern does play out.
But if history is our guide, then the gap left open on the SPX (S&P 500 index) at 2010 will be filled before any meaningful drop starts. So, even though the bigger picture pattern is looking much lower, you have to expect a rally to shake out the bears. Again, this isn’t certain, but we have seen it over and over again. Why would I expect this time to be different?
The bears are very clean and do not like to leave open gaps before making a move that sticks. Now that doesn’t mean we can’t see the SPX drop down to the 1910-1860 level here. But what that would imply, once those lows are made, expecting a rally back to at least the 2010 would be very likely.
The Black Hole
Woody Dorsey of sentimenttiming.com “Recent market behavior has confirmed the significance of the profiled 9/19 turning point. Increase in daily ranges and in volatility are typical of a new corrective reality. There is the potential for what I call a Black Hole in the near future. This could manifest as a dramatic drop over a very short term time frame. It may not but traders need to recognize what the market is saying, something different than it has in a while.”
If we do see the bulls try and fill the 2010 gap, it may be best used to lighten up on long side exposure and even look to position for a move lower. Risk is high right now for the bulls.
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