Did The Market Really Top?

After last Thursday’s nearly 1900-point decline, I recorded a video for StockChartsTV. Then, on Friday, we saw four distinct trading patterns emerge.

First, many instruments had inside days or traded within the range of Thursday’s trading range. Is this surprising? Nope. As digestion after feasting on the meat of the bulls, is practically mandatory.

Second, several instruments made new 60+ day lows on Thursday and are digesting right near a major moving average.

Third, some instruments simply outperformed, yet tested major moving averages offering a much more sensible risk.

Finally, and here is the stick in the mud, Nasdaq 100 confirmed an island top. Technically, that is a sign of a top. The question is, how much more downside if any, will this island yield?

A classic inside day pattern can be seen on the Dow Jones Industrial ETF chart DIA. Although DIA is currently trading beneath the 200-DMA, since Thursday’s high sits right on the 200-DMA, a break of the inside day pattern would correspond well with a move over Thursday’s high or the 200-DMA.

On the other hand, a break below Thursday’s low, would suggest significantly more downside.

An instrument that made a new 60+ day low, followed by an inside day and sitting on a major moving average is Space or Virgin Galactic. Therefore, a move over last Thursday’s high offers a great risk to under the 200-DMA. And like DIA, if it breaks Thursday’s low, it also breaks the 200-DMA suggesting lower prices ahead.

An instrument holding a major moving average that did not sell off as much as the indices did is Baidu BIDU. That also offers a great risk to under the 200-DMA. And again, you do not want to see this break under last Thursday’s low.

Alas, we must go back to the stick in the mud, or Nasdaq 100 and its island top. An island top leaves literally an island. An instrument gaps up and can hold that gap up for one or more days. Then, what makes it an island, is that it will then gap down, leaving the price standing alone, surrounded by space (water), like an island. QQQs had a one-day island as last Thursday it gapped down.

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