I spent most of the day resting and reading on several key concepts. First, I studied the "breakout" and examined a number of examples. I also reviewed the characteristics of rallies and the principles of EWT. I reminded myself of the fact that strong rallies require a combination of investors - the more conservative value players and the wild speculators. No rally can last without both. The job of the value guys is to come in large and buy the foundation and the speculators drive the price higher in a second wave. Wave after wave, the price builds - until the speculators fail to take the rally further. Then the market will unwind and regroup for an attack from lower levels of support.
Anyway, I was not that impressed with the breakout on Friday. I think there was a good squeeze in the morning causing the minor gapping up to the 1024 level but the second wave did not materialize and we closed only slightly better at 1026. If we do not gap up on Monday, chances of a pullback to 1018 and 1013 are likely. I think these will be the best points of entry - shorting around 1018 with a tight stop and then taking a long around 1013 with a slightly loose stop. If a retest travels down to 1013 and fully rebounds to test 1024 again, the setup allows for 5 pts on the short and 11 points on the long.
If we gap-up on Monday morning I'll look for points of entry on the long side - and possibly reduce my shorts further to 25% position.
I was playing with the freestockcharts.com website - looking for an alternative view of the same data. I created this layout to help me evaluate volume. The CVI is a running total of the difference between volume of advances less volume of declines. A looked at the last 24 months on a weekly chart. Slapped the volume underneath and used some Bollinger Bands on the price action and CVI histogram. Finally, a ran a fib time series starting from the bottom in March to see how it lined up.
Take a look in a new window:
I labeled a couple of interesting observations. The CVI broke through the top Bollinger Band and crossed well above the running average. Head left on the graph and locate the last time we broke above average. Look at the reversal and significant downtrend in the price. Also, note the actual volume this week, and for most of this leg of the rally. It is lower than the average, where it was predominately higher than average during the early stage of the rally in March. Finally, note there is a downward moving Bollinger Band top headed straight for our price action and based on the next event horizon on the Fib time series, they may hit in the next 3 weeks.
Though I read these as warning signals of a coming downward trend, we have to be aware of the levels above and below. In green, we have the 1120 resistance and in red we have support at around 880. I would not be surprised if we see these levels as a trading range during the next 3 months.
Get ready for Monday!
2 comments:
Very thoughtful & interesting chart. I wish you could do a similar analysis for the late 1930's. Based on the recent history of the complex $NASI tops preceding downtrends that we experienced in late Jan/early Feb & early June, I'm looking for the initial downtrend to begin 8/31-9/2 and run until about 10/1. Your model gives a later start. It's hard to wait on the sidelines...but, if it take 3 weeks for a downtrend to begin, so be it. My sense is that 1938-1942 history is repeating itself (88% correlation, so far) and we will go through swings in a wide trading range over the coming years.
Hey Instigator,
Welcome, and thanks for your comment.
I agree with both your points - correlation between our current market and the action seen from 1932 through perhaps 1950. However, I am not sure where in the curve we are. So many factors can come into play. Fundamentals are still weak and price action is very vulernable. We could see another leg down or a retest of March 6th.
As for the timing of any event, the fib time series aligned pretty well with the last two trend changes, but that does not mean the third horizon will! We just have to watch.
For me, the telling indicator is the pop in CVI this week on lower than average volume. I think this is a very bearish signal - and history says we should see a pullback starting this week.
For this to happen, the Friday "breakout" would need to prove itself as a "head fake". If it does not, I would look for another leg in this rally - and cautiously approach the week of 9/11 - purely technical.
All the best!
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