As I have discussed for the last two weeks, the latter part of the rally off the December lows was weak and weakening. It continued to raise the probability of some type of rotation back down. That occurred yesterday. However, the Indices also reached a point of being oversold, suggesting some type of rotation up today was a higher probability. Two signals were given today that rotation was about to begin.
The first was trading below yesterday’s low and then back above it. The second was a glaring divergence in market breadth between yesterday’s low and today’s. Both of those coupled with the oversold condition signaled today’s move back up.
What happens the first of the week will be extremely important. The indices closed at their highs today, suggesting they want to go higher Monday. They are not yet overbought, thus allowing for additional rotation back up. With that said, if resistance areas discussed in the Briefing hold and Monday is mainly a day of rotation, it would set the scene for another leg to the downside on Tuesday or Wednesday.
It is too early to determine if this is the beginning of something larger to the downside, but with each passing day, the Market will give us more information.