The stock indices have come roaring back since the night of March 2 when the Russians seized control of the Crimean peninsula in Ukraine. After opening lower that Sunday night, the equity markets screamed to new highs by Tuesday. They consolidated on Wednesday and Thursday ahead of last Friday’s U.S. unemployment report. This sets the stage for a very technical formation that should be indicative of a market that’s run out of gas.
We begin Thursday’s action. Thursday was an outside day. Therefore, it saw the market probe both higher and lower while setting a new all-time high. Importantly, in the Nasdaq, the market closed lower for the day. The market couldn’t find enough new buyers to sustain the new highs and settled lower for the day.
Friday, after the unemployment report was announced, the Nasdaq again made a new all-time high and once again, was unable to sustain it. The market then pulled a complete U-turn, took out Thursday’s low and most importantly, closed below Thursday’s low. You can see the chart with this classic reversal pattern here.
Finally, we can see on this chart that commercial traders became heavy sellers last week. This is not to be confused with the expiration cycle of the March contract. Their position would remain roughly the same if they were simply spreading out of their March and into June. This is new commercial selling which increased their net short position by more than60%.
We view the reversal bar along with declining momentum at the highs and a large jump in the commercial traders’ net short position as near term negatives in the stock indices. We will actively seek short positions in anticipation of the market testing its trend line now at 3,500.
