For one thing, with each of the successive waves of buying on both the larger monthly rally from 2009 and the smaller rally from 2011, the volume has declined even as the market made new highs. The only spikes in volume came as selling hit hard with each correction within the trend. The average monthly volume in the SPY and QQQ are now the lightest they have been since before the market topped in 2007. This decline in volume, combined with trend exhaustion, and a shift in momentum are all signs that another major monthly pullback is likely on the horizon.
And then you have the prior highs in the SPY from 2007. Since the overall rally off the 2009 lows has taken substantially longer than the fall from the 2007 high; that level will serve as strong resistance. Although the market can push through such a level to a higher high, like we saw with the weekly correction into 2011 lows and subsequent rally past the 2011 high into 2012, these only tend to lead to relatively slightly higher highs, followed by sharp corrections. The 2012 pullback was again a good example.
It was back in mid-January that I shared via Facebook to expect momentum to shift on the weekly time frame and that I would start to watch for larger correction patterns and a wider range in the markets from one week to the next. I also pointed out that the third week of February would be the first major time resistance level to hit in the S&P 500 ($SPX). This is due to the equal spacing between highs in the index since 2012 and this level hit perfectly, followed by the sharp retracement two weeks ago. In the Dow Jones Ind. Average ($DJI), however, that time development resistance doesn't hit until around the third week of March, which was a major technical reason behind the stronger push in that index to higher highs this week on the daily time frame.
Many individual securities have indeed followed in the path of the overall market and have started to show that exhaustion through rapid intraday corrections, such as in Goldman Sachs Group (GS). What we have not yet seen are the greater number of reversal patterns developing on the daily time frames of individual securities within the indices. Sure, we've seen some pullbacks with the market, but when I'm scanning for strategies on a time frame larger than a 60-minute chart, I'm coming up short... just not in the way one would typically expect at these levels.
Does this mean that my original hypothesis that the market will pull back into summer is incorrect? So far the answer is "no." We've already seen a variation of the type of follow through I was expecting back in January as the buying slowed and the market flushed two weeks ago. I suspect, however, that this increase in volatility with continue over the next several weeks as the market guesses and second-guesses how to handle this exhaustion.
Although less likely to occur, should the momentum fail to continue to shift in favor of the bears and press through the upper channel of the momentum shift shown on these monthly charts, the next major resistance level in the indexes will be a move for the October 2012 rally that is comparable to the one from October 2011 to April 2012. I've shown this on the chart of the DIA. This type of breakout, however, is most common in a new uptrend and is the least common in an extended trend. Instead, false channel breakouts are more likely at these levels. Often these false breakouts will have strong momentum on the smaller time frames, so the rapid moves higher this week are not enough to instill confidence and you can probably guess the main catch phrase that pops into my head these days: "Buyer Beware!"