Market Summary:
As I wrote in yesterday’s note, “over the past two weeks I have been cautious and have stated quite often that I see risk increasingly skewed to the downside”. Admittedly, this has been in the face of a relentless SPX index rally. The MOTR model remains neutral but has slid closer to an outright negative reading after the -88bp move for yesterday’s session. As I have continued to note, the model has shown divergent internals (downside risk) over the past two weeks. I will obviously continue to monitor and update you on the model status each day. My expectation is that we will see an outright negative reading over the next few sessions and that near term support at 5562 will break creating the likely potential for a test of 5400 (Low/Base of the June 12 Gap).
Away from the model for a moment, I would like to point out that yesterday’s price action finished a Bearish Engulfing Pattern (highlighted below). This is a two-stick pattern that needs to be considered as a real reversal signal. It is not a part of my MOTR model, but it is very relevant as it shows a shift in price action from demand to supply. Stick “1” (Jul 10) completed a +1% day for the SPX in what is a clearly defined uptrend. Stick “2” (Jul 11) had a real body that fully engulfed the real body of stick “1”. Lastly, stick “2” was in the opposite direction of stick “1” as the index sold off with an open/close move of -90bps. All this done as stick “2” had significantly higher volume than stick “1” as well.
As I have stated previously, “I would be strategically long here to take advantage of potential upside while understanding that the likelihood of a reversal is still much higher than most market participants are expressing”. Watch for the highlighted support levels below to be tested and potentially break.
Trade Support:
5562: Jul 8 low
5539: 10dma
5500: June 20 High
5400: Low/Base of the June 12 Gap
5300: Previous Resistance/Support
Trade Resistance:
5642: Jul 10 (stick 1) high
5741: Price Projection based on the April 19 low (ref 4953)
