Market Finally Falls – a Check on the New SP500 and Dow Jones Levels

Jul 31, 2014: 11:20 AM CST

It’s good when logic trumps irrationality, and price retraces in a stable uptrend instead of charging higher every single day.

Let’s take a look at the set-up, the current retracement swing in motion, and then plot levels to target as the market falls from the highs.

We’ll start with the S&P 500:

I first want to call your attention to two similar “topping into retracement” patterns that occurred in 2014.

Patterns 1 (January) and 2 (March) developed a similar sideways move after a strong, straight-up price rally.

In both cases negative divergences developed into the upper Bollinger Band.

In simple terms, the market was overextended and divergent – and it fell sharply lower.

The similar set-up – #3 – shows a comparable sideways move after a strong rally where negative divergences developed.

In other words, the “history repeats” scenario calls for a sharp sell-off to take price just under the rising 50 day EMA which could target the 1,920 level.

We’ll  determine then whether the market is setting up a larger reversal or whether we can step back into the market confidently – namely on a return back above the rising 50 day EMA – as was the case after the sell-off.

The picture is similar in the Dow Jones Industrial Average:

We don’t see the “sideways move into divergence” picture as clearly in the Dow Jones, but nevertheless, price developed a four-push negative divergence into the highs above 17,150 in July.

Price strongly shattered the rising 50 day EMA today on distribution volume.

Levels to watch immediately for the Dow Jones would include 16,500 then potentially 16,400 (the rising 200 day SMA).

Corey Rosenbloom, CMT
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