Supply shock

Yesterday afternoon I thought that the market was responding positively to the Fed announcement. But the situation changed rapidly after the close. And this morning it looks to me like a genuine supply shock (red arrows on lower chart) has hit the market.

Take a look at the 30 minute bar chart of day session trading in the ES. I have highlighted the trading range breakout level (horizontal dash line). During today's first 30 minutes of regular trading the market stayed entirely below this level and closed in the lower part of its 30 minute bar. Observe that the volume was the highest of the past three weeks (dash red oval) for a down bar, and even higher than for any up bar with one exception.

Yesterday morning I was talking about the beginning of a 50 point break (although I changed my mind after the Fed announcement). My reasons for thinking such a break is underway are even stronger now. Take a look at the upper chart, a point and figure chart with five point boxes and a one box reversal.

Observe how the bases built since early July have grown narrower (green ovals) while the top areas (red ovals) have grown wider. This is a warning that the bearish market potential is building. What concerned me yesterday was that the most recent top area is almost as big as the base that supported the July-August rally, and is bigger than the top area that led to a 120 point break from the June 21 high to the July 5 low.

Today's activity is a clearly defined breakout from the top that has formed during August. A count across this congestion area (horizontal red line) suggests that a drop to 1060 is underway. However, I think this target will prove to be a bit pessimistic since I believe that the bigger trend that started from the July 5 low at 1003 remains upward. So I am guessing the downside will be limited to 1070-75.