Coupled with the VIX reading we also see that the index has traced out a Five-Wave pattern. Markets often move in waves of threes and fives. The current pattern sports a Five-Wave scenario which may lead to a Three-Wave correction to the downside.
We also have seen a “Bearish Engulfing” pattern emerge last week. This is where the index makes an attempt for a high but fails and closes the week lower. During the attempt to rally the market surpasses the previous weeks high and also breaks past the previous week’s low ending the week on a negative note.
Finally on a momentum basis, the Dow has provided a bearish signal suggesting that if on Friday we see the index break below 12,979 and fails to climb above 13,101 then this could be the trigger to start a multi week decline.
Given the five important aspects above, next week may prove crucial along with Ben Bernanke’s speech Friday in providing an opportunity for the bears to come out from hibernation and lead the way forward for a market storm in September.
The bulls will need to take the index above 13,317 in order to negate the above scenario.
Sandy Jadeja is the Chief Technical Analyst for City Index a leading provider for Spread Betting, CFD’s and Foreign Exchange trading. He has been involved with the financial markets for over 24 years and is a trainer in technical analysis. He is a regular guest on CNBC. He can be reached at firstname.lastname@example.org
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