The market has been nearly ticking off with the precision of a clock. The head and shoulders pattern on the daily, which it seems almost everyone has been expecting has all but completed itself. The overbought conditions on cum. tick, breadth, volume, etc, and the negative divergences on MACD and RSI have materialized in what was a very big down day (considering the light volume conditions and the positive bias going into a holiday weekend). I expect this momentum to carry over to the early part of next week, during which we’ll finally test the crucial level of 880 on the S&P – however, for a short-term technical prognosis I will probably be looking more at the Dow, as it has been giving clearer signals.

Below is a chart and strategy summary of a gap-down strategy I use, which has been rather accurate (+90%) when the conditions were met. Though it considers shorting and covering 100 shares of SPY, I actually do the trading with puts of SPY, TNA, etc., which brought in gains well over 50% in each of the two sessions. If you had decided to take the overnight risk, and got in a day earlier (on the case of a bear flag, a topping shoulder, negative divergences, etc.), your profits were over 100%. In that case the signal can be used as confirmation/foreshadowing of the further move down.

Below is an update of the down volume chart, which is similar to tick and advance-decline% charts in its suggestion of a strong carry-over of bearish momentum into next week.