Given the good breadth on the NYSE, i had thought yesterday that the divergences between the DOW and SPX would be resolved to the upside. Boy, was i wrong ! We saw a washout kind of move in all the indices. So have we topped ? Has the IT correction begun ?
It's too early to be talking about any sort of trend change here. A week back i said, when we have a momentum sell in the IT uptrend, the price comes back and tests the rising moving averages i.e the 34/55 EMAs. My own expectation from the beginning of this correction was for the price to come back and test the 34 EMA. Yesterday, we saw a failure at the 34 EMA. So the next expectation is the test of 55 EMA around SPX 1258 or we may slighly undershoot it, given the high mometum of the move.
To get a better perspective of what's hapenning i have shown a ribbon chart of Fib EMAs (3,5,8,13,21,34,55). Notice how all the EMAs converge and crossover when a trend change happens (beginning and end of Oct 2005). Currently we are nowhere close to that kind of a move to even start talking about any trend change. Any talk of trend change at this point is just one person's opinion or gut feel. The price action has not yet confirmed a trend change or even close to it. A big red candle does not mean anything other than creating fear and bearishness among the retailers. Also notice how the 55 EMA flattens out as the topping process happens and as the price retests the prior highs. A retest failure and the covergence/crossover of the EMAs would be a bearish sign and a sign of trend change. We are nowhere close to that.
Anyway for the very short term, since the daily momentum continues to be strongly down and the hourly is very oversold, we should see some more downside probing, backing and filling action around the 55 EMA as the bottoming action happens. The next leg up and the strength of the move will tell us if we have indeed topped or if this move down was just another pullback in the uptrend.
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