Markets continue to bleed lower, as we have gapped higher on the open for the past two days, but buyers have been severely punished if they bought into any strength this week.   The opening prices for equities since Tuesday have all been near the high levels of the day, and gaps higher have been closed throughout the day.  Looking at a shorter-term chart of the S&P 500, there is an interesting technical pattern forming,–the megaphone.  These patterns typically form near trend reversal points, and are characterized by a series of higher highs and lower lows.  Below is a 30-minute chart of the S&P 500 futures.

chart courtesy of eSignal

What’s interesting about this pattern, given where we are here and now in the market, is that the general theme has been to buy weakness, however that hasn’t played out as well as most bulls(myself included) would like it to.  Bulls remain comfortable, despite indexes trading about 5% off their highs.  Markets reverse at extremes, and when everyone tries to buy the dip at the same time, that generally doesn’t work.  As crazy as this may sound, a nice shock in equities overnight could be the catalyst that sparks the next leg higher.

The market is at a critical juncture here, with the S&P 500 trading right near the key psychological 1400 level, and tech giants Amazon.com (AMZN) and Apple (AAPL) both reporting earnings tonight.  These two stocks have been very weak lately, leading markets lower, and their earnings moves tomorrow have great significance toward where the markets will go from here.  Another interesting consideration is that both of these conglomerates are trading very close to their 200-day moving averages, the most-followed trendline by practitioners of technical analysis.  This is widely considered to be the best determinate of long-term trend, and breaks of this trendline are considered to be very significant.  Below are the two charts with their respective 200-day moving averages in blue.

chart courtesy of eSignal

chart courtesy of eSignal

Seemingly every pullback in AAPL to this trendline has proven to be a great buying opportunity.  The last time AAPL actually broke its 200-day moving average(significantly) was 6/17/11.  Ironically, had you bought the S&P 500 index as AAPL,THE market leader, broke its 200-day moving average, you would’ve experienced about a 6 percent bounce in the broad market over a period of about three weeks.  The market is full of traps and headfakes, and this last breach caused many bulls to capitulate their positions, which was an obvious, but incorrect signal to liquidate.  As a general rule, if everyone is watching the same trendline, support level, etc., it doesn’t work.  Markets confuse the greatest number of participants involved, and obvious moves rarely work.

By no means is this a roadmap for what will happen, but is definitely within the realm of possibilities.  Keep a close eye(and an open mind) on the megaphone pattern pictured above.  There exists the potential for a great deal of noise between now and then, but the key levels to watch are now 1417 and 1385.  It is likely that one of these areas is breached tomorrow, given the market-moving news tonight after the close.  A gap down and a big VIX spike aren’t necessarily bad things.  Don’t worry so much about the actual numbers from AAPL and AMZN tonight, but tomorrow’s reaction is key.  Tops and bottoms occur at points where sentiment shifts, and tonight’s reports definitely have the potential to turn bull into bear, and vice-versa.