Cracks In The Horns?
Long ago in my market-following career I learned to enter a charting session without bias. More than a few traders sit down at their screens with bullish or bearish expectations in mind and then search for the right combination of time lengths and signals to support their "feeling". That my friend, is the kiss of fiscal death.
Which is why I was chagrined with myself tonight. After watching Friday's market close fairly bullish considering the early action and week overall, I really expected to see some basing action for the time being. With reports of Bin Laden's imminent demise and triple-witch expiration that tends to be bullish (more on that in Trader's Corner) by most pundit's accounts, I must admit to breaking my own unbiased rule when dialing up the charts for this review.
Here's what I see:
(Weekly Chart: SPX)
First up, the pro's index. Retail pikers play in the Comp while industry giants move their money here. That may offend some "big account" traders with a few million dollars to wager in tech stocks, but multi-billion dollar funds key on the S&P 500. So do I, even though I'm a few billion dollars shy of their size!
The regression channel rejected price action up near resistance where a bearish expanding wedge is forming. Why is an expanding wedge bearish? Higher highs and lower lows is evidence of a market expending energy, not storing it. A coiled wedge right below resistance would indicate building pressure to pop above that overhead mesh and assault new recent highs from there. Stored energy in a price consolidation is what it takes for price action to conquer historical resistance, not expended energy as the pattern expands.
Stochastic values are also just now turning down from oversold extreme for the very first time since May, 2001. What happened after that? Where was price action once these chart signals reached oversold extreme in relation to May?
(Daily Chart: SPX)
The daily-chart picture paints a different tale. Take out today's faulty data and a perfect expanding wedge is visible here just below resistance. Odds are that overhead web holds firm on further retest ahead.
Will there be a further retest or will price action merely fall off a cliff? Stochastic values turning bullish predict at least one more swing in the range higher from here.
(Weekly Chart: OEX)
Same view with the OEX weekly chart, except we added two light blue lines outside its narrow channel to reflect "extreme" moves outside the channel drawn. I'd look for support at the green line near 550 on the next pass down and stochastic values are now quite bearish as well.
However, the daily chart (not shown) is poised for an upside pop just like SPX pictured above, but both of these could short-cycle back down in price failure too. Nothing says that the release from oversold extreme in daily charts must reach overbought from there or even halfway up, either. I wouldn't be going short right now, but the first time daily chart signals turn bearish again above oversold extreme will be fair warning indeed!
(Weekly Chart: NDX)
NDX is still riding its historical channel down, even though the trend for three months has been up. The first sign of that channel breaking (light blue lines) came this week and may not be able to climb too much higher towards overhead resistance above.
Jeff Bailey and Eric Utley report the NDX has entered bear confirmed status in point & figure charting in harmony with what we've seen so far in all these charts.
(Daily Chart: QQQ)
Same exact chart, time-frame switched to daily. Stochastic values are bearish in techs and that three-month channel just failed.
(Daily Chart: Dow)
We've been simply amazed at the parabolic climb so many charts have made with steep trendlines like the one drawn in black. But all that sudden altitude without time to acclimate makes one very dizzy indeed. Us flatlanders moving to Denver and hiking the mountain trails at 13,000+ feet can personally attest to this. Now what?
Well, we have a bearish triangle wedge formed that begs to be broken soon. Upside will find stiff resistance at 10,000 level once more while the first measure of support sits near 9,600 and then every 100 or so points below from there. Stochastic values tried to turn bullish today but finished in straight-down fashion for now.
Having to do my best at calling market direction every day possible, I won't waffle on this one: it's my opinion that the recent highs of Wednesday last week on heavy volume marked a top in the markets that will hold for awhile. I expect price action to remain choppy and volatile but with a bias to the downside from here. Chart action clearly shows a complete & total lack of market energy to mount a serious assault on current resistance with any strength for success.
Guess what that statement will bring? Piles of email from readers who blast me for being to bearish. Plenty of trial readers taking one look at our service will turn away in disgust and never return. I know this will happen sure as sunrise, because it always does near a top. Just when everyone finally makes peace with a market trend these days the trend is nearly over.
If my market guess is wrong this time I'll be happy: my job is far easier dealing with the public in a bull market than bear. Most traders are taught to be bullish by nature. It is not natural: people with zero interest in the market do not care what it does. Babies in a crib drooling and giggling away tonight do not care if the market goes up or down. Kids waiting for Santa Claus to arrive do not care if markets go up or down. Somewhere between indifference and interest in the markets is instilled an unnatural bias to be bullish.
But my job is to call 'em like we see 'em and that's what the charts now say. Years ago I didn't like looking at X-Rays that showed my face broken in numerous places after catching a line drive softball on the pitcher's mound without a glove on my nose, but the X-ray didn't lie. It was merely a chart that shows the health of a structure without bias, just like the charts above. A bit of surgical work and time to heal the wounds left me all recovered, and the same path is predicted for future market action. Surgery to remove excess pricing and time to heal from there.
My W.A.G (wild something guess)? Markets chop around in unstable fashion until January, when things begin to decline steadily from there. Remember that is just a guess and no signal for loading up on distant-month puts. The Dow could close a few hundred points higher next Friday than it did tonight with relative ease.
Just don't expect it to stay there very long.
Best Trading Wishes,