As I discussed in this week’s Briefings, the breakout in the Stock Indices was one of two events: 1) the beginning of a move back to test the highs; 2) a false breakout that would be retraced and lead to a test of the February lows.
The breakout was on extremely low volume, suggesting it was not impulsive. Breadth never strengthened, adding to the probability we would see a rotation back down. However, often times a financial instrument will breakout and then retest the breakout point before accelerating back in the direction of the initial move. That possibility still exists as of Friday’s close.
The Indices have all moved lower to test and close the breakout point. Volume increased on the rotation down and breadth supported the move. Finally, they closed near the low of the day. This all suggests we will see lower prices on Monday. However, there are many earnings announcements next week and that can change the perception of value and the analysis.
Any additional move lower the first part of the week on increasing volume will move the probabilities in favor of a continuation of the move down. If most of Friday’s decline is retraced on any day, then the probabilities will have changed to suggest the move down was a retest of the breakout and we should see prices accelerate, assuming volume increases on any move higher. I certainly have to consider both events in front of the earnings announcements. While thee are two possible scenarios, the Markets should give us enough information on Monday to determine which will be the greater probability.