I wrote a prior Trader's Corner
article in August
(8/27/13) titled "Dow 30 (INDU) Still A Key Market 'Bellwether'".
It struck me again in market action of the past few days that INDU had formed a possible 'double top' and provided the strongest chart 'signal', so to speak, for a top which I think we've just seen; a possible interim top in a corrective period ahead.
INDU rallied recently such that the Average regained a level placing it above the Dow's prior rate of upside momentum, as measured by the multimonth up trendline seen in my Dow daily chart below. Should the Dow now continue to trade below and away from 15400, this equals falling momentum. Against Dow bearish action I would see a slide in the other indexes and which we are seeing just lately.
A bullish trading stance was indicated on price action ALONE when the S&P 500 (SPX) rebounded from its multimonth bullish up trendline per the chart highlight in the daily SPX chart below.
Dampening any bullish enthusiasm I had on the recent rally was based on how quickly my bullish/bearish sentiment indicator got to levels that are typically an overabundant or 'excessively' bullish outlook. This pattern is often indicative of a top that isn't far off (1-5 days) IF price action suggests reversal AND the index is 'overbought'. However, in the recent case very strong bullish sentiment was suspect in terms of predicting a prolonged advance, given how rapidly traders got quite bullish. This could be a new pattern as traders 'read' charts better but I think it was just getting too optimistic too soon based strictly on Fed actions. Some chickens still had to come home to roost!
Not far after SPX's rebound from its long-standing bullish up trendline, traders got what we normally see as excessively bullish; another way of looking at an 'overbought' market.
In 3 decades work with my (CPRATIO) 'sentiment' indicator (seen above) I had never seen a buildup of bullishness off a tradable bottom as fast as what was seen recently, which was in the very brief span of 6 days. This, versus the prior SPX up leg where bullishness didn't reach similar high peaks until after approximately 36 trading days; i.e., 7.2 weeks.
NASDAQ 'RESISTANCE' AT ITS UPPER CHANNEL LINE?
An 'upper' channel line is a line drawn parallel to the dominant UP trendline, with the upper parallel line drawn through a series of tops or sometimes just the most extreme prior top on the index's march higher.
Upper channel lines often define areas where a strong market that got stronger (more bullish) will taper its upside rate of gain OR top out in the sense of making at least an interim top.
Now the Nasdaq Composite Index (COMP) is falling back from its upper trend channel line. The interesting and potentially profitable question is will COMP now work back significantly lower into its broad uptrend channel. Even to the midpoint of this channel is well under current levels.
GOOD TRADING SUCCESS!