The island at SPX 2400

Mid-week market update: The SPX rose to a marginal new high this week but broken down through a narrow range due to the latest he said-he said dispute in Washington. The index appears to have formed an island reversal with bearish implications. The market has fallen through two gaps to test its support level at about the 50 day moving average (dma).

Under these circumstances, it may be prudent to think about these near-term bearish influences which are supportive of the bearish island reversal thesis:

• There are signs of complacency, which is contrarian bearish.
• Dealer positioning in derivatives could exacerbate downside risk.
• Political risk is nearing a breaking point that could affect the markets.

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