MAILBAG QUESTION:

"Any downside predictions in the s&p now that spx isnt just going up? And thoughts on tech stocks? as Nasdaq doesnt look like it wants to go down much."

MY RESPONSE:

When there's a correction after such a strong and prolonged run up like we've seen in the S&P 500 (SPX), I look at all possible charts from intraday time frames (e.g., hourly) to my mainstay daily charts to longer-term charts, especially multiyear weekly ones to see what the probabilities are of a correction.

If a chart pattern forms with implied objectives relative to such a technical formation, this can yield an objective to keep in mind as the price trend in question unfolds. This will relate to my first chart and an apparent minor Head & Shoulder's top pattern in SPX and a resulting implied downside target.

There are also times where I just make 'what if' assumptions related to common chart patterns. For example if a major index has had a decline, followed by a rebound that isn't especially robust as in a rally that lacks strong follow through, I play with the idea that a second down leg could well be more prolonged than the first. A so-called 'a-b-c' correction describes a pattern where there's a counter-trend move, DOWN in the case of our current uptrend, followed by a weak recovery rally, which acts as a possible tip off to another decline ahead; one that could carry lower than the initial decline. This will be the topic of my second chart.

There always 'has' to be a time when traders are in a maximum bullish stance and have been right time and again in being bullish so few believe that any kind of prolonged or deep correction can occur. However, sooner or later a more prolonged decline WILL take place. If this didn't happen how would we have the healthy fear of the markets that we should have in order not to get too sucked into rigid concepts of value. Where we ride trends up in bullish 'believer' mode but lose the perspective that any trend has a beginning, middle AND end.

As to tech stocks and speaking of 'super' strong moves, I'll look at the Nasdaq Composite as a possible bridge to far in my third chart. The timing of a substantial pullback is tricky but certain 'overbought' patterns do repeat in subsequent corrections when looking out over longer time horizons of many months and years.

In my first chart, that of the hourly S&P 500 (SPX), a possible Head & Shoulder's Top (H&S) pattern has formed. After the formation of the third top that is described as the 'Right Shoulder' (RS), a so-called H&S neckline was pierced at 1786. At this point, a 'minimum' downside objective of 1753 comes into play per the highlights on the chart below.

A characteristic of a 'neckline' break such as seen in the SPX hourly chart below, is that a rebound back to this line would be expected to encounter 'resistance', which so far is true here. Stay tuned on whether there is also a next decline that carries to a (minimum) downside target implied by this minor top pattern. An intermediate to major top pattern would be implied if the H&S formation seen here on the hourly chart was ALSO seen on the daily or weekly SPX chart, which is not the case.



Looking at the daily SPX chart seen next it is sometimes true after a prolonged advance that a downside correction happens after formation of an apparent top. Such a sell off is typically followed by a recovery move. In a strong bull market this is EXPECTED. What is not necessarily expected is that a second down leg occurs next that's more prolonged than the first decline; e.g., by a factor of 1.3 to 1.6 times as much.

SPX's first decline was 39 points from peak to trough. If the low of this recent decline is pierced at 1772, a second sell off could of course be less than, equal to or more than the first decline in the S&P of 39 points. If a second decline was approximately equal to the first downswing from the recent 1792 top, this would result a measured move objective being achieved and would carry to 1753, which coincidently is the same level as implied by a Head & Shoulder's downside objective seen on my first (hourly) SPX chart.

It's also not uncommon for a second down leg 'c', in a 'classic' a-b-c correction, to exceed the extent of the first decline ('a') by this second downswing being 33 to 50 to 66 per cent greater. IF 1792 becomes the top of up leg 'b', I can arrive at possible downside objectives in a longer 'c' leg decline to 1735; i.e., a second down leg that's 1.5 times greater than the initial decline of 39 points. Just speaking of possibilities here!

Lastly, I was asked about the apparently never-ending run up in the technology, social networking and internet related stocks. Of course these stocks will ONLY keep going up and will never pull back if I believe fervently in the second coming of tech. Of course, bubbles never end as we know!

Belief aside, I look at patterns in a technical way but not in terms of 'technology'. What we see on this last chart, that of the Nasdaq Composite on a multiyear weekly chart basis is a pattern of repeated correction/pullbacks that formed after COMP has gotten to the very high end of the Relative Strength Index (RSI) indicator on a 13-week basis.

I'm not of the school that 'this time' is different. Cycles and patterns repeat. That is what I KNOW to be true. Per my highlights on this last chart, 'resistance' could be anticipated both at the high end of COMP's broad uptrend channel AND given the overbought extremes seen in the RSI. Do patterns repeat at some point? Stay tuned on this one!


GOOD TRADING SUCCESS!