Tuesday, August 2, 2011

Early Confirmation of Major Pattern Completion

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A few posts back I mentioned the stages of expected confirmation if the pattern suggested had completed indicating a possible major top in place. The first was for the wave "ii" - "iv" trendline to be broken in less time than wave "v" took to form. That happened. Then wave "v" should be retraced in less time than it took to form. It lagged by about a day, so that was not very clear. Then the entire June-July (i-v) rally should be retraced in less time than it took to form. That basically happened today at least given the completion points of the pattern as I've labeled it. Since this occurred I think we can forgive the slight delay in the retracement of wave v.

The next stage of confirmation is for the dashed downsloping red line to be exceeded in less time than the June-July rally took to form. That has not happened yet, but it seems within reason that it could. Even if it happens by the right edge of the light blue box, that would be decent confirmation.

I obviously would have liked to shorted the market as I felt and noted the pattern was completing, but right now it is late to just jump on if using a defined risk trade. The best opportunity for that should be if there is a brief rally back underneath the neck line of this possible head and shoulders pattern. (see next chart)

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See the notes on the charts for details. Basically this looks like a credible head and shoulders topping formation. Ideally it should stay below the neck line or not close back above the neckline. However, I would expect a backtest from the underside in this case, though that doesn't always happen. If it does back test, the SAFEST way to short is to short it on a break to new lows for the move with a stop above the high of the backtest. Often that break to new lows will be with acceleration, and maybe even a large gap down. So, you could even put the stop tighter if there is a chart based reason to do so.

Click on Chart to Enlarge

Notice the bollinger band configuration right now. The bands are expanding indicating a volatile breakout type move. If there is to be a new downtrend, what should usually happen is for the bottom band to stay pointing down, and the top band to peak and start to trend down also. If the bottom band turns up, then that may indicate the correction is over or nearly so. The prior red and green lines show when the top band turns down after an expanding downside breakout, and when the bottom line turns up, respectively.

The daily chart is pretty oversold right now. Even if the downtrend continues, I think we are almost certain to have a rebound rally (probably quite sharp) within the week.

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