I base the higher probability for a market rebound on notable divergences between important indicators and that price action is taking place near major support levels for both SPY and QQQ. In addition the market is oversold but this last condition does not mean much in isolation. Is this going to be a correction in a developing bear market or the formation of a base for another leg up?
A week ago I wrote the post “Short-term Market Correction May Resume“. Some, aspired to technical analysis, placed to much emphasis, hopes and dreams for a quick gain on the fake island reversal signal in QQQ. Some are very upset with me instead of being upset with themselves and with technical analysis. I wrote in this April 27 , 2012 post about this island reversal pattern:
“…as far as I am concerned it is not a very significant pattern and I only mentioned it here because I know many traders are looking at it due to the mentioned proliferation of software that identifies this type of traditional chart patterns. Traders should know that in the era of HFT and low latency trading it is becoming very difficult or even impossible to profit from such old notions.”
It may be seen on the above daily chart that SPY made a low just above major support at $134.36. The RSI(14) is dropping indicating a buildup of downward momentum but the MEI(14), my proprietary indicator, is flat, indicating that the downward pressure is exhausted.
In the QQQ daily chart above, the divergence between the RSI(14) and the MEI(14) is clear. Either the RSI(14) is wrong or the MEI(14) is giving a false signal. We will find out today by the close.
If a rebound occurs, will it be just that or an indication of a base for another leg up? I hope nobody believes that anyone can answer this question using any technical method. One can only assign a subjective probability to various scenarios based on experience. My probability breakdown is as follows but be aware that subjective probabilities are constantly updated based on new information: Correction continues: 30% – Bull market resumes: 70%.
Disclosure: no relevant positions.