Securities Research Services

Friday, May 16, 2008

Watching and Waiting For a Reversal

Options expire today, so consider the possibility that any move over the last day or two and today have more to do with parking the price into maximum pain than it has to do with real demand.

Don Worden writes today:

The only fly in the ointment today was the Dominant Price-Volume Relationship. Following two market days with no Dominant Relationship, today's session was dominated by 1163 stocks with Price-Up and Volume-Down. This is a bearish relationship in any kind of market. Today's reading implies that there is low and diminishing support underlying today's advance.

Meanwhile, the SPY finds itself trading in a rising wedge pattern. While it has seemingly breeched its 200-day average, it will run into upper resistance on the wedge pattern just slightly over $143. This fits nicely into the theory that this rally will end following a false 200-day average breakout.

Why do we expect a false breakout here?

First and foremost is the fact that the VIX is trading back at lows not achieved since October when the market rolled over. A low VIX level betrays complacency, and given the fact that we remain in a primary downtrend, a complacent rally into resistance does not inspire a great deal of confidence.

In addition, volume decreased on the move higher yesterday. If you add this to the fact that there is a bearish divergence in the advance/decline ration and then mix in the fact that technical indicators, including stochastics have moved to overbought, you have a recipe for a reversal.


With yesterday's break of the 200-day average, the target price for the SPY is now just slightly above $143. Shorting in this area offers a high probability of success.

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