Markets See Largest Down Day Since Last November

The ES dropped 21.25 points one day after IBM and Apple reported big positive earnings surprises. Positive sentiment pushed the E-mini S&P 500 Futures (ES) right to the top of its upper channel resistance into the close of trading yesterday. That was enough to initiate selling as the markets opened lower and kept selling with almost no opportunities to buy the dips all day. We saw the most selling since the mini-correction back in November.

I'm not too excited about the downside yet. Market tops are generally more deceptive and take a little bit of time to develop as the market shakes out all the weak shorts and suckers in the longs jumping into the party late. I expect a retest back up to the mid 1290s on the ES possibly by end of week. We may see a little more selling first as gap fill from 1/11 tempts sellers to close it at 1270 (ES) and we could see price move as low as 1265-1266 before it turns back upwards.

I like long entries between 1275 and 1278. If we break down below 1275, I would look to get long instead around 1265-1266. Any confirmed move below 1265 and we could head all the way down to 1250.

Russell 2000 Futures sold off significantly losing 3% today (Wednesday). I am noting this because often times small caps can lead the way up or down when a market changes direction. I think the large sell-off on the Russell supports the view that a market top is upon us.

As I said in the previous post, I presume that the markets are now in the process of forming a market top. Expect choppy action in a 20-30 point range as this top forms. It is possible we may even see a higher high. If that happens, it will be a gift in my opinion, and I will short the market with confidence. Until then, lets see where the market opens tomorrow...

NOTE: This is my view of the market. Markets are always evolving and are unpredictable at the end of the day. My scenario has high odds of playing out, but that doesn't mean the market can't just sell-off without regard to historical trends...