As expected, the NYSE Composite tested the 4/16 breakout gap on 918 million shares traded. This volume surge, 37% and 15% higher than that observed during the creation of the gap and 10/2 swing low, suggesting growing downside force (chart 1). This increases the probability of another test. Bulls will be watching for a fill and close above support on contracting volume. Bears will be watching for a break of support on increasing volume.
The message of the market remains surprisingly bullish despite clear signs of cause building since September - which could easily be extended to July. Rising pessimism, seasonal cycles (chart 2), and the distribution of leverage behind price (equity and volatility DI from COT Matrix) suggest a bullish backdrop despite a growing number of bearish calls. This complex message increase the probability of an approaching bottom rather than meltdown. Those that fail to recognize it will likely continue chasing (selling) weakness.
