Market tops generally go though a couple of phases. The initial phase begins with preliminary supply and is followed by a sideways movement over a period of time, a process known as distribution. During this first phase buyers feel as though they have been given the opportunity to buy on a correction in a bull market. Economic data remains favorable pointing toward continued growth. One needs to recognize, however, that the stock market is a discounting mechanism, pricing in expectations, not current conditions. Market tops are not put in when things look bad but when conditions appear to be bright. Market bottoms occur when the outlook seems darkest when fear and panic are in control of the markets.
We have been talking about market tops. The last discussion was about a test of the last point of supply (LPSY). This test is happening right now! Should prices move through this level the next step could be an Upthrust after Distribution. (I’m keeping on with this negative view since I just don’t see a positive volume and price picture taking place). An upthrust typically will take prices to new highs or test the market’s previous highs. This upthrust is usually short lived as the prices fall back rather quickly, indicating that this is the last gasp rally with strong but short lived demand.
Here is a classic case of an upthrust after distribution:
Apple Computer 2012
A light volume retracement will usually indicate the need for a test of the upthrust. A retracement on heavy volume usually puts an end to the rally with the bear market soon emerging.
A heavy volume rally back to the upthrust would suggest renewed demand which could actually send prices to new highs and possibly voiding the topping process. Evidence of heavier volume on the rallies and lighter volume on the reactions would suggest that an accumulation phase is ongoing and that a new leg to the upside is possible.
To say the least the markets are getting tired. Which is very evident in the chart below.
The markets have been moving sideways for a few months, it appears to be distribution. The Federal Reserve is continuing it’s policy of inflating financial assets with the hope of stimulating the economy, though very few good paying jobs have evolved from the process. It has been said that you never go against the Fed and this distribution may turn out to be just a correction in this massive move that has taken place over the last 4 years.
A mere correction of this bull market could be substantial:
Perhaps, there is one last leg to the upside that the Fed can manufacture?
Stay tuned and keep protecting your profits with close stops.