What could save the stock market in July? More government borrowing and

Pfizer
PFE,
+2.28%
has released promising early results on a coronavirus vaccine, along with partner BioNTech
BNTX,
-1.35%.
Other companies are also in the running.

However, such optimism does not justify the extent of the strong stock market rally from the lows. The real impetus behind the market’s strength is money printing by the Federal Reserve and borrowing by the government. Now politicians have set up the stock market for a decline this month. (More on this below.) You can expect more stimulus and support to keep the stock market rising.

How might things play out? Let’s explore with the help of a chart.

Chart

Please click here for an annotated chart of the Dow Jones Industrial Average
DIA,
+0.43%,
which tracks the Dow Jones Industrial Average
DJIA,
+0.35%.

Note the following:

• The chart shows an island reversal.

• The island reversal pattern has been accompanied by high volume, the Arora sentiment indicator giving a sell signal, an inside day following the island reversal, RSI (relative strength index) at an extremely overbought level of 95 and the smart money selling near the highs. All of the foregoing makes this an especially important pattern to watch.

• The chart shows the resistance line.

• In a separate pane, the chart also shows the resistance line for S&P 500 ETF
SPY,
+0.55%,
which tracks the S&P 500
SPX,
+0.45%.

• The chart shows that in spite of several strong rallies, the stock market has not been able to break the resistance line. The stock market will have to break the resistance line and stay there for at least a few days before going higher than the island to negate the negative pattern.

• Before turning bearish because of the pattern described, know that the whole pattern can be negated in a jiffy on good news on a vaccine or more money printing and borrowing announcements from Washington, D.C.

• This stock market has been controlled by the momo (momentum) crowd.

• The chart shows in the RSI pane that the stock market has lost its momentum.

• The chart shows that volume is consistently not high. Compare the recent volume to the volume on the day that the island reversal occurred, as shown on the chart.

• The chart also shows in separate panes the price action in two of the momo crowd’s…