Wednesday, May 22, 2013

Market Update: Short Term (Trader's) Time Frame

Today's sell off and reversal has broken the short term supply and demand pattern as pointed out on the top most chart in this post. This chart is a 30 minute chart covering the last 20 days of trading in the S+P 500 cash index. Previously we have had 6 separate reactions against the short term trend, all resulting in sell offs of 12-15 points in length before reversing and making new highs.
Today marked the 6th time, as we opened and rallied straight up to 1685 then proceeded to drop 15 points. We then found short term support for another rally, but this time failed to make new highs and in which case reversed making a new lower low deeper than 15 points in length. This was our first warning sign of a short term top in the market as we proceeded to drop over 38 points in length from high to low.
Though we most certainly could get a bounce back inside day tomorrow, I believe the odds favor an overall continuation in the direction of today's reversal. But just how much downside should we be expecting?
As you know from my last Long Term update that I don't believe we will get a serious correction until at least the upside target in the Dow Industrial Average has been achieved.
So let's take a look at the bottom chart in this post which is a daily chart of the S+P 500 going all the way back to the November 2012 lows. As you can see we have a pretty solid up trend line in place, along with three previous sell off reactions in the 45-60 point range, with a 60 point drop being the most recent. From current all time highs that yields in the vicinity of 1625 on the S+P 500 as an initial support zone for a reversal.
Now as I noted in the previous short term market update that we have had rallies between 100 and 130 points off these swing lows. However this last swing high put in a 150 point rally, exceeding the size of the other two. So there is a chance of a deeper retracement, in this case I look for the 1597-1600 area to be support as we have confluence with the up trend line, previous swing high and 50 day moving average in the vicinity. I do not expect to see this short term reversal turn out to be anything more than that.  
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