Short-Term Market Correction May Resume

The first sign for that was the price action during the day, yesterday. The market opened higher and prices continued to rise until about noon time when they reversed course and started moving on a downtrend. There are corroborating signs like the fact that yields continue to fall despite the bounce in equities and eurusd has not followed.

On the daily QQQ chart above I note the following:

1. Yesterdays pin bar, i.e. a price bar with an open and close near the low.
2.  The gap that is part of the island formation I talked in a recent post and is an open one. I said in the post that “this pattern alone does not guarantee easy money”.
3. The divergence between RSI(14) and MEI(14), one of my proprietary indicator. This is the second divergence in a period of 3 days.
4. The massive reversal from yesterday in the sign and magnitude of P-delta values of the p-indicator for both QQQ and SPY:

For details about the meaning of the p-indicator numbers click here.

All of the above point to a resumption of the short-term correction that started in early April and stalled last week. However, these are just technical signs and may lose their significance immediately in the face of a good piece of fundamental news. The market moves are fueled by fundamentals mainly because this is what value investors consider in their decision process. Technical traders should always remember that technical signals do not constitute a primary phenomenon but only an epiphenomenon, in the sense of modern analysis of phenomena, i.e. a secondary phenomenon that moves in parallel with the primary phenomenon and usually does not involve causality. The true causality lies in the fundamentals. This is also one of the main reasons that technical traders as a group always have mean returns much lower than those of the group of value investors.

Disclosure: no relevant positions.

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)

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