This week has been playing out as we expected. Last week, we saw the market rally on light volume into a resistance zone on the daily chart. Light volume rallies are always a warning sign, much like the calm before a storm.
The Way I Look at Bearish Price Action
The First Heavy Selling Volume Day – I see this as large institution selling massive amounts of investments (stocks and commodities) because prices have risen enough for them to book profits or they know something we don’t and they are getting out before the majority of traders find out.
Light Volume Rally/Drift Higher – After a heavy volume selloff, we tend to see prices drift higher on light volume. This is when the institutions stop dumping investments and allow the retail investors (uneducated traders) to buy the market back up.
Bear Market Trend – In a downtrend, we see these two phases enter and exit the market. These patterns happen on every time frame from tick charts to yearly charts. Trends vary in length from 1-2 cycles and sometimes 10-20 cycles and more.
Current Market Conditions
So far this week, we have seen the market sell down on increasing volume, which is bearish and pointing to lower prices. On Wednesday, we saw prices move up on light volume with volatility rising into the close with a short wave of selling. This was indicating to me that sellers were starting to enter the market again.
The daily chart below clearly shows the heavy selling and drift higher on declining volume. The market is now trading deep into a resistance zone and looking ready to drop.
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S&P 500 Intraday Two-Hour Candle Charts
You can see the same selling patterns repeat themselves. Since the February 5 bottom, we have been forming a much larger bear flag, which makes me think a big drop is only days away.
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S&P 500 Trend Trading Conclusion
Both stocks and precious metals are trading with the same chart patterns and volume levels. So if you are wondering about gold, silver, and oil, I am seeing a similar scenario playing out for them also.
The reason I keep bringing these bearish patterns up in my reports is because once you master trading in a down market, you can make money during some of the fastest moving times in the market. I have always preferred shorting the market because prices drop much quicker then they rise. So profits are made quickly.
Also, if the broad market does eventually roll over later this year—and I am not saying it is, but if it does—then you will feel somewhat comfortable with the positions we will be taking.
By Chris Vermeulen of TheTechnicalTraders.com
