Thursday, October 2, 2014

Today's Bottom Reversal Attempt

Today stocks put in a bottom reversal attempt.  All the key factors are in place based upon my algorithm, so this could be a legitimate time to make a trend continuation buy.  However, the position would need protected with a sell stop below today's low.

This is a shorter term signal in that price is only at a 1 month low.  And these have higher failure rates than similar longer term signals.

Now a subtle factor here is that the Russell 2000, IWM, did break below recent support as suggested.  However, price reversed back to the upside, and it closed substantially higher, where the other indexes were flat.  To me this illustrates the flush out of stops and then trade algorithms kicking into buy mode just below support, which occurred on the Russell but not on the other indexes.  This being the case, it seems to be a hint that the buying is not broad spread legit  market interest, rather it may be simply a reflection of the price/chart structure of the Russell 2000 index.  So for now it looks good.  However, I have seen this type of trade action before at key chart points.  And what I would warn of is that a break of today's low would indicate that all the short term program buying was exhausted and that prices may then fall sharply.  A notable comparison may be the August 2011 break of the June 2011 low.

So at this point it may make sense to be flat rather than short.  Also, a move above today's high could be a typical buy signal.  But a move below today's low could be reversed into a short or used to establish a new short if out of the market.

As a side note, the significant lows over the last year or so have occurred at the 126 day simple moving average.  And today's reversal on SPY occurred there as well.  So again, based upon that measure of trend, this would be a logical stopping point for this decline.  And again at significant market turns, there will be a change of character.  So, if prices decline below today's low with several percent follow through, that may reflect a larger scale market turn.

This is my take on things, anyway, and I will track the market more closely here for the blog as volatility is picking up.


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