Bulls Face a Battle in the Week Ahead

 | May 10, 2013 | 2:00 PM EDT
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It's been just over a week since I last weighed in on the overall market. That column, from April 30, will serve as a good reference point for what follows. Heading into the afternoon on April 30, the market was showing signs of weakness, but those signs were offset by a number of factors that were still working against the bears. This left me bearish but uncommitted to a longer-term short. 

The result of this tug-of-war was a strong downward flush in the major indices throughout the session on May 1 that took the indices into their first main levels of support on the intraday time frames, but it was not enough to change the daily tide. The bulls quickly recovered the next day and continued to punish the hardcore bears by busting through the year's highs with a strong opening gap on May 3.

In my April 30 column, I drew a template of what such a recovery often looks like within the type of trend development the Nasdaq was experiencing on the 60-minute time frame. I have once again included it below.

QQQ, 60-Minute

In this context, a correction will typically last for about 1.5x to 2x each of the previous intraday corrections (marked 1 and 2 in the chart of the PowerShares QQQ (QQQ) from April 30) and will contain two smaller corrective channels. These corrections will then be followed by another strong breakout to the upside before the trend finally stalls long enough to break the trend channel. In the Nasdaq, this channel is the one that has been in play since April 18.

The template held true, but the Nasdaq proved even more resilient than average when faced with this type of trend development. The two-wave correction lasted for the anticipated amount of time, moving sharply higher once again beginning May 2. The difference was that the correction was primarily through time and not price. The index formed the two smaller corrective channels moving sideways. This added strength has also meant that the reaction off the typical turning point for this type of trend has also shifted. Instead of a pivot off highs on May 3, the Nasdaq slowed its ascent and kept the bears at bay. 

QQQ, 60-Minute

Nevertheless, a crucial moment in this trend has once again arrived, and the bulls will face another battle in the week ahead. The Dow Jones Industrial Average and S&P 500 are also indicating a struggle on the 60-minute time frame. Note that on the chart below, the SPDR S&P 500 (SPY) is striking the 100% price extension level I discussed in the April 30 column. The Dow moved past this resistance intraday, but similar resistance remains just overhead on the weekly time frame in that index. It is once again time for the bulls to beware.

SPY, 90-Minute

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