Today’s market action provided us with a fantastic cue in the formation of the candlestick charts.

Take a look at the picture to the left which describes the Falling Three Methods candlestick chart pattern.

The requirement of bearish falling three methods candlestick formation include,

* The pattern should be formed in a downtrend.
* On first day there should be a long bearish candlestick.
* First day candlestick should be followed by small-bodied candlesticks of following day whose real-body and/or shadow do not cross the range of first day candlestick.
* On last day there should be a long bearish candlestick which should be closed well below the first candlestick’s range.

Now take a look at the s&p 500 over the past 4 trading days:

The s&p 500 is definitely at a cross roads. First, all of the Trade Triangles have gone negative, and second, price has crashed through a major support. Take a look at this chart:

First lets take a look at the indicators. You can clearly see divergence in the MACD, as well as a negative reading on the MACD histogram. You can see negative divergence in the On Balance True Range, showing negative pressure on price. There is also negative divergence in money flow, ADX trend indicator, and a negative DM- DM+ cross over. In fact, just about every indicator I have looked at is bearish.

However, the biggest technical indicator is the breaking of the long red trend line. As you can see I have drawn in support at around $95 on the SPY, which is exactly how I’d be trading this market right now. Short the SPY, or buy some deep in the money put options.

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