Trading success is a hard won, hard fought game and is hard WORK as we have to look past the 'obvious' and discount the common wisdom or herd mentality. This is the underlying reality. It's a great testing ground, which is why winning trades and winning years are such an accomplishment.
I wasn't completely in 'tune' with the recent unfolding top as I thought it could still be a bullish consolidation prior to some further upside, although I did point out 3 technically bearish aspects to chart and indicators. These aspects were NOT ONLY the sideways trend and inability to make further upside progress but also the accompanying:
1.) Possible double top seen in the S&P 500 (SPX) as the index never managed more than a 1-day Close above the early-January intraday peak at 944.
The reason I often write about a 'decisive' upside penetration of a prior high (or prior low) is that it's common for a single such Close, but without further (upside or downside) follow-through the NEXT day. In the case of SPX there were two isolated (not consecutive) such closes. This is the 2-day rule, whereby a single such close above/below resistance or support can be an illusory 'head fake'. In the index, such 1-day closes are often the result of stops being 'run' in the futures.
2.) Extreme overbought readings seen with the 13-day RSI.
It is harder to pick tops than bottoms as tops don't tend to have the volume 'climaxes' seen at lows and due to the fact that overbought readings can and do go on for days and even weeks. Whereas oversold extremes often are short-lived.
Nevertheless, when there is a situation where an overbought extreme goes on and the price move is sideways, with an inability for the index or stock to achieve a breakout, especially above an important prior high, there's a significant probability for at least an interim top.
3.) 1-day extreme seen in the equities call to put volume ratio in CBOE equities options. I define 'high' bullishness as any single day where equities call volume is at least 1.7 times that of total equities put volume. I consider 'extreme' bullishness as defined by any one-day where equities call volume is AT LEAST 1.9 times that of equities put volume.
Besides the possible double top that was forming in SPX, we had to look at the retracement amount that had been achieved. There's a tendency for retracements of prior moves (downswings or upswings) to run out of steam after completion of retracements equal to 38, 50 or 62 percent; i.e., the common fibonacci retracements.
If the retracement exceeds 38 percent, look for possible resistance or selling pressures coming in after completion of the next higher retracement level of 50%, which has been seen with the Nasdaq Composite (COMP); the Nasdaq being where the most compelling stories for earnings breakouts are occurring.
My chart examples will illustrate the above points and ONE other key pattern, that of a rectangle top. One such rectangle top was seen and followed by an upside breakout above it in COMP and one that could be unfolding in SPX.
One final bit of chart pattern FACT: A rectangle top is where prices trend up into the formation and oscillate between two horizontal trendline before EITHER breaking out upward OR breaking out downward.
There is a measuring implication for either the upward or downward breakout, which is that a 'minimum' price objective for the breakout move will be equal to the price distance between the upper or lower horizontal lines. In the case of the upward breakout, I look for a possible minimum move of the prior price range ADDED to the upper line (an upward breakout) or SUBSTRACTED from the lower line in the case of a downward breakout.
I starting with the successful achievement of a 'minimum' upside objective in COMP after an upside breakout of a rectangle top pattern. This objective and its calculation is noted below. There was the oscillation between an area of highs and lows (2 or more for each) to form the lower and upper lines of a rectangular pattern as highlighted in yellow on the Nasdaq Composite (COMP) chart seen below.
The line of highs was at 1775, with the greatest number of lows falling at 1765, for a 100 point spread. With the COMP breakout above 1775, it is a simple add of the 100 point prior price range to get a minimum objective (after the breakout) of 1775. The high for the move was 1880. Minimum objective fulfilled!
I've also circled on the chart above the succession of overbought extremes seen in the 13-day RSI after completion of a fibonacci 50% retracement, representing bearish point 2 of the bearish aspects referred to above. In addition, there is the additional aspect of completion of a fibonacci 50% retracement which can suggest a 'natural' area of temporary or permanent resistance.
Bearish aspect 3 referred to above, that of having at least one day where equities call volume is at least 1.7 times that of that day's (CBOE) equities put volume will be shown on my next chart, that of the S&P 500 (SPX). Such extremes coming after a number of days where prices keep stalling in the SAME area is a tip off to a possible top, whether its an interim or temporary top or not.
Let's speculate! Yes, I know you do this all the time, whenever you buy or sell options. Lets speculate on the possibility that SPX holds at or near the low end of the rectangle drawn on my next chart. If SPX holds in this area, even if for a while, the formation will look like a rectangle top.
What are the possibilities for a price objective on either a breakdown below 879, at the lower line, or an eventual upside breakout above 950, at the upper line? I've calculated these possible 'minimum' downside or (eventual) minimum upside objectives on the chart. Right now, given the break below the 50 and 200-day moving averages, things are looking a bit bearish. But, I'm not so sure and I do find the outlined pattern to be of interest. It may be something, or nothing much. Stay tuned on the outcome!
A last point is seen above and relates to the high bullishness or 'overbought' extreme seen in my CPRATIO indicator that occurred after a period where SPX was unable to decisively (there's that word again!) penetrate the upper end of the line of resistance AND a prior top (early-January). You would think that traders would step away from a lot of activity in equities calls when it seemed uncertain as to whether the Index was making a top or not.
A parting word: DON'T BUY APPARENT PRICE (RANGE) OR ACTUAL BREAKOUTS IN OPTIONS. That strategy may work in the index futures, but it is usually a definite losing proposition in options. Those floor brokers love to jack up those premiums on such apparent or actual 'breakouts' and SELL those inflated options to you.
GOOD TRADING SUCCESS!