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Market Stops in Whipsaw City


The market is punishing everyone while it prepares for a strong directional move.

Friday was a pretty wild session, with a dramatic intraday reversal. The S&P 500 (INDEXSP:.INX) has been Whipsaw City (which is near Chicago) since 1627 -- and so far, the failure to break below that level has kept alive the alternate count that 1627 marked a significant bottom. The market is compressing now, and preparing for a sustained directional move.

Trading anything but the edges of the range can be dangerous in a market like this, because patterns that form within the range are often worthless noise, and typically fail. The "job" of a pattern like this is to continue whipsawing both bulls and bears until one side throws in the towel -- at which point, the market will trend strongly away from the pattern.

Trading these, I try to stay away from the middle of the pattern. The main way I've had success with this type of pattern is to buy the breakdowns and sell the breakouts, which is the opposite of what one normally does. And those are risky trades, because you're basically playing for a rather direct whipsaw -- and meanwhile, there typically isn't a clear stop level. In fact, you're essentially taking the opposite end of the trade from the people who just got stopped out.

And that only works until it doesn't. At some point, the compression reaches a crescendo, and the market either launches, or collapses, strongly. The only reasonably clear levels which indicate much of anything (beyond the next five minutes) are outside of the noise zone: 1627 and 1670.

Click to enlarge

The fractal in the Nasdaq Composite (INDEXNASDAQ:.IXIC) bears similarity to the pattern from May and June -- it will be interesting to see if it reaches a similar resolution:

Click to enlarge

Contrasted with Nasdaq, which is flirting with the summer highs, the Philadelphia Bank Index (INDEXDJX:BKX) is presently still stuck below its topping pattern:

Click to enlarge

In conclusion, the market has created a heavy noise zone, and has been whipsaw city lately. The rally has the look of a bearish rising wedge – and while that pattern doesn't always end bearishly, it does almost always indicate a strong directional move is coming soon. Trade safe.

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