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Point & Go Figure: SPX Shakeout?


Will the short-term lead to the long-term?


So here we are, once again at the crossroads. I've written before about the shakeout pattern. This is what I call a pattern of deception. On a point & figure chart it appears as a sell signal that is not really a sell signal.

To briefly review, a shakeout occurs when an unbroken potential double top break occurs, followed by a double bottom sell signal. This potential pattern has formed on a 10x3 scale in the S&P 500. A move to 1200 will be a reversal up in the shakeout, the conservative "action point." The shakeout completes with either a triple top break, 1250, or a failure, the potential double bottom that would be created with the move below 1160.

The crosscurrents are apparent. The longer-term bullish percents for the broad market are negative across the board while shorter-term indicators, such as the percent of stocks above their 50-day moving average, have recently reversed up from very oversold levels.

S & P 500 Index (SPX) (10x3)
(Chart courtesy Dorsey Wright)

My operating thesis is that the longer-term indicators (presently showing a negative overall context) will trump the potential bullish shakeout pattern developing in the SPX, resulting in a failure of this pattern (if it does reverse up at 1200) in the next few weeks as these short-term indicators relieve their oversold conditions. What would change that thesis and void it is if we get a reversal in the longer-term bullish percent indicators sometime in the next few weeks. We are nowhere close to a reversal and context change currently. As well, over the past six weeks I have been discussing the cyclical trendline violations from the 2002/2003 lows that have occurred in a large number of stocks in formerly leading sectors such as financials and real estate. All of these factors lead me to believe the path of least resistance is lower over time, not higher.

Meanwhile, those who are short term and very active have actionable levels to operate long based on point & figure charts, but since my style is a bit longer-term I still view higher levels in the SPX as levels to sell with probabilities favoring a larger move lower. As usual, one's style and timeframe determines how one views the risk/reward here.

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No positions in stocks mentioned.

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