Last week we felt that the index looked vulnerable to a pullback, in the end this bout of expected selling only really materialised on Thursday. The concern for the bulls is the strength of the selling on Thursday, posting a sharp bearish “outside day” candle.
This does suggest that when sellers emerge they are ready to come in with some size. As a result we do feel that the risk/reward of buying or even being 100% long here does not look that favourable.
As stated last week opening shorts would be too bold as the underlying weekly trend is so strong, but we would recommend lightening up on certain sectors if you can, and perhaps opening shorts on some vulnerable looking names within the index, or be tempted to pivot across to commodities, or bonds until the situation becomes a little clearer.
The market could drop down to the previous resistance line, now support, black line, currently around 5,100. Only if this level were to break would we start to be more concerned that this expected near-term profit taking was building into anything more serious.