I have been bullish on the market (since last September), however recent action is making me nervous.
Given the extreme momentum thrust in the YTD rally, I have felt any possibility of a market top would be longer-forming and protracted, again because the built-up prior momentum would have carry-through, enabling any dips to recover fairly quickly. However, note the chart below:
It’s an hourly chart of the S&P 500. Over the last ten trading days, the index has been unable to break through the all-time high level of 1565, getting to or near 1564 a few times only to abruptly retreat. Note also that during these ten days, the S&P 500 has traded within a wider range (1540-1564), i.e. volatility has been rising. This expanded high-low range is bearish to me as long as the index is unable to get through the 1565 level. It indicates distribution is occurring, which is typically not a bullish occurrence. The wide bid/ask spreads infer that buyers and sellers are indecisive and reacting to external events with great uncertainty.
What is forming is an ascending triangle, with higher lows and stalled (flat) highs. Again, we will see if this triangle breaks out to the upside through 1565 or to the downside through 1556. Needless to say, a break above 1565 will confirm that we remain in a bullish uptrend (risk-on). However, if this ascending triangle were to breakdown in a meaningful way, it could indicate that the tide has turned and prior built-up momentum has finally been worked off. I would then reassess my bullish stance on the market.