Monday, October 13, 2014

Expanding Bias Confirmed in This Decline - Look Out Below?

As of this mornings trade in SPY, it appears that the correction is developing with an expanding bias as suggested in the last post.  The ends of expanding downside patterns can really end with sharp downdrafts.  At this stage I am more or less expecting that.

The break of the August low today is a notable chart occurrence and may lead to some buying and an attempted reversal.  I will post if there are legitimate reversal attempts according to my methods.  At this point hourly time frame momentum and MACD, etc are very oversold, but they are not showing any divergence.  So I would advise against believing that today is a bottom day even if a reversal attempt occurs.  The odds just consistently favor divergence to appear at the significant market turns.

For now if you look at the weekly MACD and stochastics of the SPY and other indexes you can see that the indicator is opened up with a downside configuration.  So this means that the odds are for the larger trend to be down.  From a purely technical standpoint, I would not personally even consider a long trade until there is hourly time frame bullish divergence on the technicals while the weekly is down.  Even better would be for the daily MACD to end up oversold with divergence.

From a multiple time frame stochastics analysis on the weekly chart of SPY, the fast line is just getting to the oversold area.  So we could be alert for this week or next for a daily time frame stochastics divergence to develop while the weekly is near oversold.  We are not there yet since the daily is at a new low in the stochastics for this correction.  So again, waiting for bullish divergence to develop would be advisable here before considering long.

As another guide for the trader here, read this link showing what the last 2 bear markets were like in terms of price and time duration of legs down in a bear market.  The typical bull market correction is about 1-3 months and averages about 10-11% decline.  A bear market leg down is on average larger and longer than that.  So what you want to do is to track the developing price action (and sentiment of course) and constantly compare......"does this look more like a bull market correction, or a bear market decline?"

In my opinion the SET-UP looks complete for a bull market top to be in place, with broad spread weekly time frame divergences, etc.  However, it is early to make comparisons beyond that.

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