Tuesday, August 30, 2011

Market Now At Resistance Zone - Bearish Set-Up

Click on Chart to Enlarge

The market action is developing about perfectly for a bearish trade at these levels. I had showed that after prior waterfall declines the tendency was for the market to rally to near the high of the second candlestick prior to the low, and that we should probably expect a flat type pattern to from here. Well we now have the market forming a nice upward ABC potential pattern here which is right at the downward blue trendline which may be resistance and price just exceeded the high of the second candlestick. The retracement is right in the reversal sweet spot based on prior waterfall declines.

The fast stochastics has now had time to cycle back to overbought. When the red (%D) line goes back below 80, that has been a good indicator on the recent cycles that a high was made, and a stop could go in above the recent swing high. So that is the plan here. Instead of shorting right here, wait for a little confirmation and stochastics to turn down, then go short with a stop above the high. The target will be for a new corrective low, at which point we can initiate a trailing type strategy.

IF this happens, based off of historical corrections, it would indicate we are likely, in fact, in a bear market rather than a deep bull market correction. The market is obviously coming out of a heavily oversold condition so it is possible that it continues to rise. So waiting for the stochastics signal will help to avoid jumping here while there is no confirmation of reversal.

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