Wednesday, December 3, 2008

Bear Market Rally Framework

A reader pointed out a pattern that is not readily visible on the normal bar charts most of us use. Using a close-only chart, a megaphone or expanding triangle pattern appears and it has one interesting implication. Check this:

Is it possible to see Dow 10K in the next few weeks to months? It sure looks that way.

This pattern is usually analyzed as a topping pattern so I am not so sure that the reverse is true as a bottoming pattern. But it does give us some sort of structure to follow.

How about this? After reaching 10K it forms a regular triangle on the back side - creating a diamond pattern. Again, diamonds are thought to be tops so who knows what it might really mean? But then again, who ever expected the VIX to hit 89!

The old rules are up for rewriting.

6 comments:

Amalan said...

Michael,

interesting posts, here and in Barron's. The problem I see is that we are already closer to resistence than we are to support, so if the market moves higher and overcomes resistence, it will probably be too late to buy. According to your chart in Barron's, the resistence is roughly at 880 on the S&P500. But, if we breakout, according to your chart in this blog, we'll probably have only another 1000 points on the Dow; if the market falls to ~8000 from here, and does not break support, a buy at that level will provide a much higher rise (to 10K) for traders to profit from. However, a market decline from current levels without breakout above resistence itself is considered bearish! So, how can we use this scenario to our benefit - by hoping it will pull back somewhat from here and then continue higher without testing support again?

Also, I wondered why the Dow is still being used for technical analysis - is this because others are using it?! Doesn't the S&P500 give a much better market representation compared to the 30-stock Dow?

Something else that struck me - if we can create a megaphone expansion in the Dow and simultaneously create a falling wedge on the S&P500, it might signify that we can create whatever we want! It depends on the eye of the beholder. Even in your megaphone Dow graphic, I can see a falling wedge too (if I include the September highs and connect the two subsequent highs). So, I wonder if we are falling or rising.

You have chosen MACD today, but you have used RSI and OBV in the past. Would you count the three as three separate entries on the bullish side of the ledger?

PD Quig said...

The weekly S&P recently hit an unperfected TD Buy Setup while the Nasdaq's Buy Setup was perfected. The Nasdaq then proceeded to break below TD support while the S&P held support. It seems that no matter what tools are deployed the signals are pretty well mixed at this point.

As trade-vestor who takes and holds positions based on the weekly charts, I'll never catch the tops or bottoms, but I've stayed short since August 29, despite the stomach churning ride. I am about to violate my system and go to cash, however, before the stochastic trips the 20 line, keeping in mind that pigs get slaughtered.

Doug said...

the main problem lately is the technical time tested tools such as stochastics and macd, etc. have been basically worthless. I mean gm has had a positive divigergence in the macd for about 6 months as it has fell off the earth. so we need to be carefull to rely too much on that stuff these days.

Quick Takes Pro said...

Amalan,

If the market moves over resistance it is - in normal markets - the best time to buy as demand has proven to be more than enough for supply (another name for resistance).

The Dow is used for demonstration purposes since everyone knows what up 100 means or the Dow hit 8000. But over time, the S&P and the Dow track each other so it is not much of a difference. I look at both plus about a hundred others every day.

Quick Takes Pro said...

PD,

I have been writing about that since the crash (of 2008). Our tools still work but variables we assumed were constants due to their lack of change over time are now changing big time.

Quick Takes Pro said...

Doug,

'Zactly. See previous comment.

If the S&P breaks its wedge I'd take a position of about a quarter of what I might have done in the past.