Friday, January 30, 2009

Weekend Special: What has changed?

Lets first review the week. If you have not caught up you may want to read my 2 breakout scenarios posted this month.

1. Mid Term bearish play towards 640

2. Mid Term bullish play towards 1000

Both scenarios still hold true as we have no clear signs of either direction. Personally, I am leaning towards the bullish side for reasons I am explaining below.

Last week I had anticpated a breakout based off our long term falling wedge reversal pattern. The attempt occured just as I had described it as a 3 day scenario, however ended in failure with our reversal on Thursday.

While we are approaching the bottom ranges yet again our volume picks up drastically. This was clearly visible again on Friday this week. Any attempts on the upside are occuring on lower volume and are beaten down again by the bears. So what do we make off this? We continue to have bad news and fundamental concerns within the market place but are not able to break the market down further. Investors may be comfortable with this 800 range as a bottom at least for now.

We ended the week exactly as we started it - something I did not think would occur but this leads to further conclusions we can take. One of the key differences between this week and last week is our divergence on the MACD. We had negative divergence coming into the week and are now at zero. MACD divergence never stays at zero for long.

Our trade channel is getting narrower and narrower and the current pattern is coming to a completion. We all know long term pattners will give us great insight of things to come, especially one that has been building up for almost 4 months.

Now why am I still bullish while we continue to spend the majority of our time on the bottom end range. Take a look at the updated daily graph below for some insight. I have made some more marks at key points. Vertical lines whenever we have zero divergance and a 20 day moving average. Now the interesting thing is the comparison to our January to March 2008 time frame. We are setting up for an exact replica as you can clearly see.

Review the colored dots with the data.

Red = below dma, negative divergence, setting a low point in the market, recovery off the lows
Blue = reversed breakout above dma, positive divergence
Yellow * = above dma, positive divergence, reversals once we break below dma, uptrending MACD
Violet = below dma, negative divergence, large intraday ranges, test at the dma (wed this week) with a quick reversal down to the low ranges

* we have the exception of our Nov capitulation that created the low. How can we justify this key difference? - we were coming off one of the steepest down turns with VIX at levels never seen before and a fairly quick reversal leading to a rally from 740 towards 900 in just 5 days on extremely high volume. Is that enough to ignore or remove from this analysis? You be the judge.

Indecision in the market place is not easy to trade and you are always in conflict with either taking a quick profit just to see the trend continue strong after you exit or attempting to trade a trend just to see your stop loss take out your position that had strong gains. In hindsight we can easily explain and justify the moves that have occured but when you do not know the next 1 min candlestick it is difficult to make a trade especially in a market place that can snap any second - we have seen how violent those moves can be and they can come at any second. Do not let this month get you discouraged - it won't last and we will be able to trade with a proper trend again soon.

So in summary - we are well prepared to identify our next 8-12 weeks once the market gives us a sign. We have two scenarios coming into next week starting Monday with either one last day spent at our lows and possibly a dip into the 700 range that will quickly reverse as a v-bottom or a weekend surprise with a strong gap open. I for one am excited again to start February with a good understanding of where we will end up this quarter.

Kind of ironic that we closed the week at 8000 on the DOW. Will it be the last 8000+ close this quarter - or will it be the last time we almost dropped below 8000? We will make a turn early next week so be ready.


  1. Excellent post, I really enjoy reading your insight. Thank you.

  2. I also wanted to share what I have found to be a valuable resource in terms of supplemental market comentary - Dan Gramza's free market studies found here

  3. Glad you are liking the details provided. After careful review this really seems to be setting up for a rally. We are weeding out the sellers as we get closer to the bottom each time. You can see the volume has dropped quite a bit with anticipation of whats to come. While we do not have enough buyers to continue on the upside we have alos managed to lower the sellers now as they are unable to break us lower.

    This is a text book bottoming process we are going through at the moment. Unfortunately this technical component is now driven by fundamentals, and we are running out of time and will break out very soon, driven by fundamentals or not.

    Thanks for the link. Will give it a quick view some time today.