Monday, March 26, 2012

Near Possible Pattern Completion

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This is a chart of the Russell 200 cash index.  All major indexes are similar at this time, but this one is still below its 2011 high.  It appears that an upwards ABC pattern may be completing off the Oct 2011 low.  However, there is no confirmation of this yet.  See the chart above for initial signs of confirmation.

If the low at "4" is broken this week, that will be good confirmation that a significant high is in place.  That would also be a failed breakout of the May 2011 high on the Dow and S&P 500, which would continue to suggest a double top chart pattern could emerge.  If the entire "C" wave is retraced in less time than it took to form, that would be indication of a major high having taken place.

Monday, March 12, 2012

Extremely Low Volume - Probable Pullback Ahead

Both the NYSE and Nasdaq volume traded at extremely low volumes today.  The lowest in over 2 years excluding holiday low volume trade.  Actually the NYSE had 1 lower volume day a couple weeks on Feb 24th.  Low volume like that is not supportive of a market rally from everything I've studied.

I think it is safe to say that a successful breakout of the May 2011 high should see at least decent trading activity indicating that institutions are interested in buying the breakout.  Also, I think that looking at past highs like that, there will typically be a larger definitive candlestick to the upside by this time after exceeding that old high if the breakout was solid.  So, obviously anything can happen, but think about what this means. 

Also, the 50 day average volume is hovering basically at multi year lows.  Troughs in the volume are associated with rally tops.  And a multi year low in volume in the context of a double top potential chart pattern could portend a sharp decline.

I again suggest that traders steer clear of the long side.  The price has not broken decisively, but it seems to be just a matter of days.

Thursday, March 8, 2012

Backtest of Wedge and Gap Filled

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The large gap down form Tuesday was filled across the board today on the indexes.  It will be interesting and maybe telling on how the market reacts tomorrow.  If a major decline is to ensue then I would expect the market to immediately sell off after the gap fill.

The Dow 30 and Russell 2000 both rallied back right to the lower trendline of the wedge today forming an ideal backtest at this point.  I don't think the market will be set up to accelerate down on a break of Tuesday's low yet.  Since the S&P 500 did not break the trendline yet, we may need to see it break and back test before the stage is set for the bottom to fall out.  So I think we may see some downside below this week's low followed by another brief rally attempt before a breakaway point to the downside.

Last week formed a picture perfect doji candlestick on the weekly cash Dow 30.  So that is additional evidence that a significant high may be forming.

Wednesday, March 7, 2012

Initial Break of Rising Wedge

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The Dow 30 and the Russell 2000 have both broken the lower boundary line of the rising wedge/uptrend from the Oct 2011 lows.  The market rose today forming a swing low and a partial back test of the trendline.  Most wedge pattern breaks that I have ever seen are followed by a back test of the lower boundary, many times even with a close back above the lower trendline.  I am not saying that will happen here, but on individual stocks, it very often does.

What I would suggest here is that any swing low, such as today and yesterday, that forms below the lower trendline, sets the stage for an accelerated decline on a decline below it.  So if the market move below Tuesday's low, the likelihood of cascading declines increases.

The SPX and the NYSE have not broken he corresponding trend lines yet, so maybe the market has a little more downside chop to do before accelerating down.

As the middle of this week passes, a key time relation for several markets to change trends is passing which I believe increases the odds that gold, silver, the Euro, and stocks may have established significant highs and be set for substantial declines.

 Currently the double top chart pattern on the SPX and DJX is nearly ideal and would imply major losses in the months ahead.  The key components of a double top are a well established prior trend, a lower volume second top versus the first, and ideally the second top should slightly exceed the first, which functions to run buy-stops before the major reversal occurs.  All of those factors are present in the current case.  It would take a break of the Oct 2011 low to confirm the double top, but while that may seem an already large decline, it would imply another 300 S&P 500 points to the downside below the Oct 2011 according to the standard measuring projection.  That would place the S&P 500 in the 700's if the textbook double top pattern and target are met.