Option Investor
Update
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The price pattern for the rally off the March low continues to be potentially very bullish as depicted in dark green on the 60-min and daily charts posted last night. Therefore I'll be watching the development of today's pullback to see if it will continue to support the idea that it will be just a pullback to correct last week's rally which would set up an opportunity to buy it. But as I have been showing, in dark red, the price pattern could turn bearish if the decline turns down more sharply (with a move down to SPX 760 as the target). The market is certainly short-term overbought so it's anyone's guess what will happen from here.

But the larger pattern for the SOX is one of the indexes that has kept me thinking the March rally may have been just another bear market rally. In last Thursday's newsletter I showed the weekly and daily charts of the SOX to point out why I think we have a very good setup for another leg back down. This is the closest to a pound-the-table short play as I've seen in several months. Whether it will work out or not will only be known in hindsight.

The weekly chart shows the bearish wave count for the move down from July 2007 and the parallel down-channel. The wave count supports the need for another new low (for the 5th wave). The bounce off the November low looks like a perfect little bear flag pattern. The SOX needs to drop below the March low to confirm the end of the bounce. That's obviously a long way back down just to get to the bottom of the flag pattern (near 190). How far it will drop from there is the question (or if will even drop to the bottom of the flag pattern).

SOX weekly chart:
[Image 1]

The daily chart shows the flag pattern from November (at least I'm calling it a flag pattern until price breaks out the top of it) and the parallel channels show how well the SOX trades technically. I thought it would reach 257 for two equal legs up from November which have had it reaching the top of its flag as well as the top of the larger down-channel shown on the weekly chart. As shown in pink on the daily chart that could still happen. It takes a break below 225 to tell us the rally from March 3rd has finished.

SOX daily chart:
[Image 2]

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