Friday, March 1, 2013

Possible Major Pattern Completion Today in Stocks - Look Out Below

Click on Chart to Enlarge

I will get a video out soon on this, but today was a possible major pattern completion for stocks, with the Dow holding out to make new highs and the other indexes failing to confirm.

Today was the ideal completion day for the upward pattern that began the first trading day of September if the pattern is an ABC with wave B ending in late December.  The C portion takes exactly 1/2 the time as A+B which is standard when the B wave takes a lot more time than wave A.

Given the correct technical picture of sharp bearish divergence, extreme bullish sentiment, and non-confirmation between major market averages, the context is right for a high as well.

Additionally today formed a shooting star top reversal candlestick in the Dow and DIA etf.  It pierced the upper bollinger band and reversed to close lower.  The other indexes failing to make new highs suggest they are weaker, with the Nasdaq 100 being the obvious laggard.  Given the rising wedge in the Nasdaq, if price breaks below this week's low, that would indicate extreme weakness and a failure to hold the rebound after the recent break of the wedge line and the accompanying large VIX spike.

With each and every possible break to lower lows once the lower boundary of such a pattern is broken, the probability of a breakaway move to the downside increases.  So this is a case where if unsure, you could sell short on a stop if prices break to new lows.

Given the pattern at play here, the expected initial confirmation that this outlook is correct would be for price to completely retrace the rebound since Tuesday in less time than it took to form.  So if we see prices back below this week's low by this coming Tuesday morning, then we have some solid evidence that a pattern is likely complete.  And the minimum target would be the Dec 31st low so the reward to risk on a short would still be excellent even if waiting for confirmation.