For many weeks, we’ve waited patiently for direction from institutions, which appeared (in hindsight) to be in distribution mode.
In order to confirm our directional anticipation, we need a follow through day. Therefore, we are looking at a couple of scenarios for the remaining three days of this trading week.
The USD has broken out of a triangle pattern, created from lower highs and higher lows, with its peak in November 2015. We’ve discussed this triangle for months. The thrust will likely dissipate at some point, at which time we’ll be looking for slowing momentum. Perhaps we will see a pullback to breakout (PBBO). Note the likely areas will be previous pivot highs like 97.62 in July. Pre-market USD price is 97.85, just North of this pivot.
If this change in direction were to occur, we would look for the dollar to move lower and for SPY to back above the multitude of block trades that delineate a barrier above 213.25. In this scenario, we would quickly move back into the range depicted in the chart below. Blocks are heavy in the zone between 216 ~ 217.
It’s important to note, that the 60 minute is subordinate to the daily. In other words, any counter trend in the 60 minute will be viewed as short term. As such, the 60 should lack the importance placed on the daily, or medium term trend.
In this scenario, the 60 minute bounces briefly. This will allow a short at highs. We would look for the 60 minute to rollover and the daily trend will take hold once again. Resistance at the broken trend line from the February lows, will prove too much for bulls. Block resistance between 213.25 ~ 213.95 confirms with increasing down volume. Distribution will take hold and lead to markdown. Prices will accelerate towards targets discussed, 211.24, 210 and possibly 207.50. The latter represents a 5% drawdown from 2016 highs.
It’s important to watch yields as well. If yields continue to show strength as we see this morning and the dollar resumes its upward thrust, that would provide the bears with more ammunition and lead more towards scenario two.
It is possible that neither scenario happens or perhaps we see a stalemate. Price could gyrate in a tight doji pattern, so its important to read the pattern. We would prefer to see a “follow through” day to confirm the change of trend. We’ll be watching with you in the trading room.
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