Tuesday morning I sent out a tweet to say that we may have seen a top in the stock market. Today, the S&P 500 has just closed down by 1.20%, it’s biggest fall in over 100 days.

There was not any significant analysis behind my tweet. It was merely a gut reaction based on the fact that the stock market had (for once) failed to take out its recent highs. It was going nowhere and volatility was almost non-existent. Something had to give.

Have We Seen The Top In Stocks?

Of course, a 1.20% fall in the stock market is nothing. It only looks like something on the chart because we have had so many small range candles for so long. It is probably better described as just a random price movement and there is every chance that the market will simply spring back and get back on it’s merry way.

s&P 500 drops 1.3%

However, today’s price action, with the market closing firmly at it’s lows, will give investors concern and that does have the potential to move the needle which could lead to a more drawn out correction.

We all know that many people are long the market and if enough investors take profits based on market movement that can easily trigger a feedback loop where lower prices beget even lower prices.

What’s Next?

Going forward, I can see two possible scenarios playing out over the next couple of days.

Either we will see a swift computer-driven rally to take markets back up towards their previous levels. Or, we will see a continuation of today’s drop as investors attempt to bank their profits.

I do not think there will be many investors in a rush to enter the market at this point so the only hope of a rally will come from computer models. Models which profit from providing liquidity.

My personal view is that we will see a continuation of the down move tomorrow and the market will be put under more pressure. At the very least, we are likely to see a more volatile market over the next few days with larger price swings.

If this tiny blip does turn out to be a larger market correction, there are going to be some very difficult decisions to be made by investors and traders who have only got into the market in recent months. Mechanical system traders on the other hand are likely to find plenty of opportunities at their disposal.

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