Tuesday’s ‘outside day’ started with optimism and ended with pessimism.

An ominous pattern has occurred in the U.S. stock market. Investors definitely felt it Tuesday, when stocks cratered after rising earlier in the day.

What is the best strategy for investors at this time? Let’s explore, starting with a chart, which can show us this pattern.


Please click here for an annotated chart of S&P 500 ETF SPY.  Similar conclusions can be drawn from charts of the Dow Jones Industrial Average DJIA,  Nasdaq 100 ETF QQQ, and small-cap ETF IWM. Please observe the following from the chart:

The ominous pattern is the “outside day,” as shown on the chart. In an outside day, the high is higher than the previous day and the low is lower than the previous day. The chart does not include pre-market data. In the pre-market, S&P 500 futures ESM8,  were much higher than the ETF SPY shown on the chart for regular hours.

• The point of the outside day is that it started with a lot of optimism over good earnings and ended with a lot of pessimism on the theory that company earnings may have peaked.

• Many gurus are attributing the outside day to the 10-year Treasury yield reaching 3%. However, yields were approaching 3% the day before and in the morning when futures were much higher. The trigger for the selloff was a comment on the Caterpillar CAT,  conference call and lower-than-expected earnings from 3M MMM.

• The outside day, like the one that was traced, is a bearish pattern.

As the chart shows, the selling occurred on relatively low volume. This indicates that the necessary cleansing is not yet done. Please see: “Be careful, a necessary ‘cleansing’ in the stock market is still under way.”

• The outside day has occurred in the context of a broader consolidation pattern shown on the chart. The consolidation pattern is forming a triangle. In the present context, the probability of the market breaking outside of the consolidation pattern to the upside is only slightly less than the probability of the market breaking to the downside.

• The relative strength index (RSI) is neither overbought nor oversold….Read more at MarketWatch.

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