Keene Little : 12/17/2006 10:43:40 PM
I like to keep an eye on NYSE since it's a broader market than the DOW or SPX. I'm going to provide a review of the charts and show why I think we could be near a major turning point for a trend change. Starting from a wider view with its weekly chart you can see that price has rallied strongly from the summer up to the top of its parallel up-channel from 2004.
When I see price rallying up to the top of a parallel channel like this (on whatever time frame) as oscillators move into overbought I rarely see a breakout as there isn't enough buying power to blast it higher. We've seen the DOW and SPX break above the tops of their channels but I suspect there's been more manipulation going on there, especially with the amount of money coming in from the Fed in the past few months. Link
These "measured moves" inside a parallel channel are typically very good at identifying potential turns in the market. Weekly RSI has reached the same level as it did back in May when it last touched the top of its channel which was followed by a steep sell off. This daily chart zooms in on the move up from June: Link
The move up from June has formed an ascending wedge. On my Elliott Wave count the move up from June is the 5th wave of the rally from October 2002 and 5th waves often form ascending wedges (descending wedges in a downtrend) since wedges are often terminal patterns in a trend. The buying starts to dry up so the new highs get progressively lower even as the uptrend line continues to support pullbacks.
Wave-(5) on the chart, which is the move up from June, needs to have 5 waves and those are labeled as 1 through 5. Wave-5 of (5) is the move up from November 28th and you can see it also is forming an ascending wedge. So we have an ascending wedge on two degrees of the EW pattern, both for the 5th waves of each degree of the count. This is good confirmation that the rally is very likely reaching its end point. Now zooming in just a little closer with an expanded version of the daily chart shows a potential reversal candlestick from Friday. Link
I left off a lot of the trend lines and labels for better clarity. First thing to notice is the shooting star doji at resistance at the top of the parallel up-channel (and the top of the ascending wedge--the trend line drawn along the highs from July which is not drawn on this chart). This is a heads-up candlestick and is warning of a potential change in trend. Confirmation is with a red candle following it, meaning a down day on Monday is needed.
Next thing to do is compare what's happening here vs. what happened in May, the last time the top of the channel was touched. After the big green candle in May there were three "doji" days which indicated indecision and a battle between the bulls and the bears at that line of resistance. If we see the same kind of thing this time we could see some chopping around, and slightly new highs, before the selling overpowers the buying (assuming of course that the sellers will get stronger again).
When I look at the short term pattern (30 and 60-min charts) I see the possibility for another push higher before the move up from December 12th is finished (that move up looks like it needs a 5th wave up to finish the count, so in other words the 5th of the 5th of the 5th wave). This is the same thing as I covered for ES at the end of the day Friday (4:37 PM) in case you want to review those charts.
Bottom line for me as I study the different time frames and signals on these charts is that I see the pieces are in place to call a top to the rally as of Friday or after a minor push higher early this week. Will it reverse to a downtrend now or will it again morph into a larger wave count to the upside? That of course can never be known. I try to identify turning points and that's what I'm doing here.
Now before Jeff jumps all over me for being mega-bearish and reminds me of the number of times I've tried to call a top I'll simply remind him, and all of you, that I will call turning points as I see them so that you can prepare yourself for a potential turn in the market. When the market proves me wrong and continues climbing higher then we stick with the trend. Usually the kind of pullback (choppy vs. impulsive) gives me a heads up that we haven't finished making new highs and I've been regularly calling out those signals as well.
The trend is clearly still up as no uptrend lines have been broken. Therefore we are still in a bullish market. The chart review above is to help you identify how I look for turning points and I hope it was helpful.