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Could Market Signs Be Pointing to Lower Equity Prices?

|Includes: SPDR S&P 500 Trust ETF (SPY), UUP

The market has spent the past few days moving upward in the morning only to have strong selling in the afternoon.  Term this a day trader's paradise and you have about the only investor type that enjoys where we are currently.

On a big picture basis, the NASDAQ stock index could be in the process of  forming a dreaded "head and shoulder pattern."  My hesitation here is that I woke up to a CNBC report where Daryl Guppy, CEO of Guppytraders.com, claims "investors are betting on a tech replacement cycle and should prepare to be fried."  He went on to explain to them about the potential of the NASDAQ forming a "head and shoulder" price pattern.

John Murphy of StockCharts.com also pointed out this same potential pattern to subscribers yesterday.  This kind of wide spread acceptance of certain technical patterns whether based on price or on certain market internals, example the Hindenberg Omen indicator, are sure to invalidate them.  The market tends to fool the most traders, most of the time.

In the very short-term, we had a reversal on Monday to the upside.  We then had a reasonable market move higher on Tuesday with late selling.  This rise was on lower volume than past market declines.  Finally, yesterday, we tested the upside again but were unable to hold the gains into the close.  Again volume was weak.

This is very negative that the low volume up days are unable to hold their gains into the close.  In fact, yesterday's candle price pattern formed a doji reversal pattern and we believe the short-term trend over the next few days is probably down.

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A closer look at what is driving this market is one thing....the dollar.  The dollar rose out of a decline wedge pattern recently and over the past three days has experienced some profit taking corresponding with a market rise.  We believe the trend for the dollar is still up in the short-term and this should lead to weakness in the market indexes over the balance of the month of August.

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We would not be surprised to the see the market averages test their range lows.   However, we are still range bound and as yet cannot really hazard a guess as to whether we stay in or break the range in the longer-term.  When it does break this range, look for a strong trend to follow in the direction of the break.



Disclosure: Long Dollar via UUP; Short SPX via SDS