Once again the market faced a massive sell signal on the daily-index charts as all of them put in long, black candles off an uptrend on Friday. Nothing is one hundred percent in this game, but let's just say those type of candles are good for reversals the very next day, well over ninety percent of the time.
Not two days later, but the very next day. If we research the SPDR S&P 500 ETF (ARCA:SPY) and the SPDR Dow Jones Industrial Average ETF (ARCA:DIA), which represent the S&P 500 and Dow respectively, you can add in 73 and 75-RSI readings on top of those black candles. To be blunt, the odds of an up day of any kind the next day are almost zero. In fact, not only are the odds of an up day near zero, the odds of a strong down day are high. Not just a small pullback but a strong gap down that runs lower and closes on or near the lows for the day. It boggles the mind when you wake up and see the futures are green and holding throughout the morning.
You shake your head and laugh and say, hopefully, thankfully, I'm not front running the down side because it would be really painful. This is part of the reason why the market hasn't sold hard yet. If you're a bear, you have to be very fearful about getting in the way of this market. Many have over and over and they've felt too much pain over and over. It's getting old for them and they're losing their will to do so. Who can blame them. Not I.
If you feel enough pain by doing the same thing over and over due to emotion ruling your thought process, at some point you stop doing it. Fear is a tough emotion and if you fail enough times the fear level increases dramatically. So the bears are feeling left out and losing faith while the bulls are simply rotating money around, thus keeping the market afloat as sectors unwind while others rally off the bottom of their most recent pullback from overbought on their short term charts. The market should be selling and selling very hard but, for now, we just aren't seeing it, thus, you stick with what's working until a technical change occurs on the key-index charts.
With everything working well for the bulls you still would be doing yourself a major injustice if you turned your back on the problems facing this market. To ignore them can be very hazardous to your financial health. When you think nothing can go wrong,that's when it does. It can happen tomorrow or months from now but the market has so many problems it can make your head spin. Each one by itself is cause enough for something nasty to the down side.
These problems will not go away. Negative weekly divergences are not going to go away and neither are massively-overbought monthly charts. The only way the bull/bear spread goes away is with major selling. Thus, nothing can just disappear through wishing it away. These headaches normally start down trends out of the blue. You get a huge gap down that runs lower all day and closes at or near the lows on increasing volume.
You then follow that up with another strong gap down that doesn't come back. Once that takes place that's when the trend has changed. That said, the indexes do have many gap ups to act as support on any selling—not to mention key moving averages so the selling won't come easily. Just recognize the environment and adapt. Everything is overbought, including the majority of the daily charts.