Day of Reckoning

Bull markets last 4-5 times longer than bear markets, so investors get conditioned to buy the dips. In bear markets, however, this habit can get one in trouble because it motivates a person to constantly anticipate a bottom and take positions that are objectively counter-trend.    

Bear markets are also punctuated by very strong rallies, which are sometimes stronger than rallies in bull phases because shorts tend to cover quickly. These up-moves are naturally very convincing to the bulls, and reinforce the belief that “this is the bottom.”

Like faces in a cloud, however, what one looks for in the market, one generally finds. Last week it was hard to ignore the bullish Morning Star pattern in the Financial ETF (XLF). The Morning Star is a well-known bullish candle pattern and when it occurs in a key sector like the Financials one should expect the general market to follow that leader. Naturally, this played out over the last few days.

Due to the confluence of several technical factors, however, we are now at the Day of Reckoning. Volume profile shows a large spike around $21, which is acting as resistance for the XLF here. This volume ‘ledge’ also corresponds with the downward-sloping 24 ema, which is a respected moving average for this ETF.  That confluence doubles the resistance to upward momentum. The third factor is that XLF has been rising on declining volume. That’s not a good sign if you are a bull.

I believe this $21 area in the XLF is a “line in the sand” for the market as a whole. If XLF can close above $21.50 in the next couple of days, it will bode well for another leg higher. If not, then the ‘fat lady’ is probably starting to sing her next aria of lament.  (Peak performance coaching for private traders)  (Services for traders at RIAs, banks and hedge funds)




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