I was just having an email exchange with a member and we were talking about tops, the same applies to bottoms. The thing that has always interested me about technial analysis is the fractal nature of it, patterns that you see on a 5 day chart will be similar to a 5 min chart and this is because the market is moved by sentiment or emotion to a large degree. When I taught Technical Analysis my goal was to get my students to see price chart as a map of human emotion and not just lines, price patterns and indicators, that's a hard thing to do, however I believe that's where you find the most insight in to the market and that's also why I believe to be a good trader, you need to really be able to confront yourself and your emotions and break certain destructive cycles. The market, just lke self-discovery isn't a one time event, it's a process of constant learning and evolution.
However I'm getting a bit off subject. The subject is market tops and we are now in a bounce that we were looking for since last week, many of us to be able to use that bounce to add or initiate positions, it's a lot easier to say that before the market bounces then it is to do it once the market bounces, like the saying, "Every boxer has a fight plan until they are hit with the first punch".
Today's trade has been VERY lateral and considering some of the major support legs of the market such as energy and financials are being knocked out, I see this as probably a pretty decent area to add to shorts or start new ones.
Today's SPY trade is range bound and after yesterday's performance, is showing no signs of follow through buying, which leads me to believe that yesterday was a sugar rush rally and today the longer term implications are being thought out.
The October rally was pretty strong, but notice it didn't just reverse, tops are a process and very rarely an event. Once the top has reversed, usually the downside is pretty quick and strong.
On a longer term scale (this is the fractal nature of the market) we have a strong QE based rally and again, a topping process, not a linear reversal event. Once the topping process was over, the downside was sharp.
Looking at today and yesterday, I didn't expect a big downside reversal today, the fact there's no follow through and some of the biggest sectors are falling like oil and financials, shows weakness or the legs of the rally are being taken out. Note in the red boxes there are several cases of a strong rally, but there are few event driven reversals and usually process that starts with a loss of momentum (smaller candle bodies) and then the reversal takes place. In fact the second box from the left looks very much like the last 2 days. I think we are in a different spot right now then we were then, back then we were topping from the October rally, now we seem to be topping from a minor bounce, so the outcome after should look different in my opinion, the work or the process of creating the October rally top is done, we saw the downside and it was pretty sharp, now we are seeing a counter-trend bounce, it's not at all the same situation.
In any case, I just wanted to bring that to your attention.
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