Say, Something Sure Smells Rotten, Fella

Before yesterday morning's sharp upside reversal (which eventually gave way to a heavy afternoon fade) we presented Members with the following daily chart for the small cap ETF illustrating (in light blue) a bear flag pattern around the key $140 level.  A bear flag is a continuation pattern which presumes the prior weakness will resume after a period of largely sideways action and uninspiring bounce attempts along the way. 

The subsequent intraday spike higher yesterday appeared to render that analysis null and void. But by the time the closing bell came around we see a pronounced fade back within the confines of that flag. 

Moreover, this morning's gap down in the small caps suddenly made the bear flag thesis all the more viable, as bears actually found a candlestick variation which favored them and did not (at least not yet) serve to trap themselves into another awful situation of a V-shaped rally to new all-time highs. 

Simply put, the lingering small cap weakness remains a legitimate concern for bulls, considering the breakout in July failed to hold for more than a few days. 

So while the likes of Disney and Priceline suffering deep earning selloffs is of course short-term cautious, the small cap action, if not stabilized soon, may very well be the key piece to the market's puzzle heading down the home stretch of summer. 

Overall, the rally attempt yesterday failed miserably, which puts us back squarely in the defensive camp until further notice. Long setups are mostly having issues holding breakouts, and leaders like AMZN GOOGL may very well need to take the rest of the summer off to reset.