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Stock Market Panic in October?


There are stock market patterns that warn of the probability of a reversal in trend and possible panic or crash.


There are stock market patterns that warn of the probability of a reversal in trend and possible panic or crash. A classic pattern mentioned in Technical Analysis of Stock Trends by Robert D. Edwards and John Magee is the Broadening Formation. They comment, "[T]he Broadening Formation may be said to suggest a market lacking intelligent sponsorship and out of control – a situation usually in which the 'public' is excitedly committed and which is being whipped around by wild rumors… Nevertheless, the very fact that chart pictures of this type make their appearance as a rule only at the end or in the final phases of a long bull market lends credence to our characteristics of them."

Daily Chart of $SPX

Edwards and Magee go on to say, "[W]hile further advance in price is not ruled out, the situation nevertheless is approaching a dangerous stage. New commitments should not be made in a stock which produces a chart of this type and any previous commitments should be switched at once, or cashed in at the first good opportunity."

Edwards and Magee describe two types of Broadening Formations. The first is "the Orthodox Broadening Top, which has three peaks at successively higher levels and, between them, two bottoms with the second bottom lower than the first. The assumption has been that it is completed and in effect as an important reversal indication just as soon as the reaction from the third peak carries below the level of the second bottom." In the daily chart of the $SPX, the Orthodox Broadening Top becomes complete as it crosses below the bottom trendline at 1395.00.

The second Broadening Formation is the Broadening Wedge. It has slightly less bearish implications, but nonetheless signals an end of the trend once the bottom trendline is broken. The Broadening Wedge shows three rising peaks above two bottoms rising to a lesser degree. The daily $SPX chart shows both formations, with one nested within the other. By all appearances, the first Broadening Formation may trigger the second. This has yet more bearish implications, since the target is somewhat lower.

An even more bearish omen is that, while there is some doubt that the first target may be met, the second formation in the daily chart raises the odds considerably of this pattern having a successful outcome.

Weekly Chart Of $SPX

This leads us to the weekly $SPX chart shown above, showing a larger Broadening Formation (with even more dire consequences) encapsulating the two smaller formations. Its trigger point is above the average targets of both smaller Broadening Formations.
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