Market Summary:
Friday’s note focused on a few main points which explained why I continue to see market risk at current levels as skewed to the downside.
First, my MOTR model, which measures the internal strength of the SPX index based on momentum and trend, is continuing to show negative divergence. The model has not shifted to outright negative, but the signal continues to degrade/diverge from current price action.
Second, general market statistics are concerning. As I mentioned on Jul 11, “the SPX continues to grind higher with historically low breadth and below average volume. Additionally, the index has had just one peak-to-trough pullback of 5% YTD (again, historically low downside volatility)”.
Lastly, there have been some very interesting candlestick formations over the past few sessions. Specifically, I highlighted the Jul 8 Doji which marked perfectly increased indecision and volatility at all-time highs. Additionally, I explained in detail the Bearish Engulfing Pattern which developed on Jul 11. As I noted in the Jul 12 report, “This is a two-stick pattern that needs to be considered as a real reversal signal”. For details on the Bearish Engulfing Pattern please refer to the Jul 12 report which can be found at https://islandcapitalinvestments.com/
The Jul 12 price action was interesting as well. The SPX index rallied over 1% from the open/low (ref 5590) to a high of 5655 only to fade hard (80bps) into the end of the cash session, closing at 5615. Although it may not seem like it, this price action fits and is consistent with the Bearish Engulfing Pattern from Jul 11. The resistance level was identified in my Jul 12 report as the Jul 11 high (ref 5642). The high on Jul 12 was 5655. This was a slight and brief overshoot and faded on a closing basis. Resistance remains in place.
Overall market action remains complex as price rallies to new highs as internals degrade and/or stall. I would remain cautious while watching for the highlighted support levels below to be tested and potentially break.
Trade Support:
5562: Jul 8 low
5553: 10dma
5500: June 20 High
5400: Low/Base of the June 12 Gap
5300: Previous Resistance/Support
Trade Resistance:
5642: Jul 11 (stick 1) high
5655: Jul 12 high
