Almost on schedule, the pendulum has swung back to “sell” on the S&P 500. The technical setup on the index shows extremely overbought conditions with buying volume falling just as the index reaches for overhead resistance (see chart below). Combine these conditions with the launch of earnings season, a new round of U.S. economic releases (Fed meeting notes and inflation readings), and options expiration, and the market sits atop a potentially explosive situation.
Assuming traders are still holding a fistful of puts after the fear generated from the last oversold conditions, there could be just enough support for the market to continue drifting under resistance for the rest of the week. If so, a correction is more likely early next week after this protection disappears. Either way, I expect resolution to the downside that will be almost as swift and sharp as the bounce the carried the market out of oversold conditions last week.
The chart below describes the current set-up (click for a larger view). Note that the NASDAQ has a very similar set-up. The index triggers a short if (once) it violates the lows from Monday (or Friday). Overheard resistance provides a clear stop no matter the entry point.
Click for a larger view
*Chart created using TeleChart:
Be careful out there!
Full disclosure: no positions