On Tuesday, the indices bounced back from an 'oversold' condition. Honestly, I always try hard to avoid using the terms 'overbought' and 'oversold' as much as possible (see The Teflon Market) because either condition can persist indefinitely in a strong trend. However, as you shall see below, all indices, except for the Transports, managed to achieve their downside technical objectives on Tuesday per the chart patterns discussed in Monday's Morning Report, The Water Was a Mirage.
Starting with the DJIA, a double top set the stage for a breakdown that practically hit the downside target right on the nose.
Chart 1. The DJIA achieved its downside objective.
The same goes for the S&P which overshot the estimated downside target of the double top by only a couple of points before bouncing back.
Chart 2. The S&P 500 achieved its downside objective.
Nasdaq 100? Practically the same pattern, with the exception of the gender combination.
Chart 3. The Nasdaq 100 achieved its downside objective.
Now here's something interesting... The Russell 2000 is a toss-up at this stage as Rounding Tops can break in either direction. A rise above 804.16 should trigger a BUY signal.
Chart 4. The Russell 2000 is at a crossroads.
Just as interesting is the message conveyed by the DJTA (Transport Average). Clearly, we have a double-top situation on our hands, but no breakdown as of yet. Moreover, the DJTA's 50-day moving average is now flat at best. Given that the DJIA has already made a lower low, but not the DJTA, a Dow Theory non-confirmation is in place at the current time. In short, the market is at a crossroads.
Chart 5. The Transports are waving a warning flag.
Notice that every time the UUP reached its 200-day moving average, it bounced vigorously in concert with a sell-off in equities. (Also see Looking through TLT's Lens). Having reached the 100-day moving average, the right shoulder of a potential Head-and-Shoulders pattern is now in place. All that is required for the U.S. dollar to break down and for stocks to resume their rise is the slightest hint or rumor of more quantitative easing.
Chart 6. The UUP (U.S. dollar) is waiting on the Fed.
In summary, caution is advocated, despite the green on the TV screen that you've probably seen in the last two days.
Peter (Twitter: @61Point8)