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Follow the Trend, Outlast the Swings


These 100 to 200 point intraday swings in the DJIA are becomming commonplace as confidence hits an air pocket...


"Feelin down 'n' dirty , feeling kinda mean
I've been from one to another extreme..."
Double Vision (Foreigner)

"Day number three of the new post correction bull market." That's how one prognosticator defined the tape after Wednesday's close.

Seems a bit premature to me, to say the least, to be proclaiming it's business as usual. After all, a scant sixty minutes before the close, the S&P had knifed out remarkable, bone-chilling reversal of fortune, skidding 25 points from 1503.90 to 1478 in an hour.

Hey, there's nothing wrong with cheerleaders, as long as they don't get in the way of the real game.

It's important to remember a few tried and true market principles when stocks are swinging from one extreme to the other:

1. Fast markets, strongly trending markets typically only move two to three days against the trend before reversing in the direction of the predominant underlying trend.

2. The sharpest rallies, although short-lived, many times occur in the midst of declining markets.

3. Sharp rallies in the midst of liquidating markets see a lot of short covering, which weaken the market further, robbing it of buying fuel.

Instead of the usual last hour surge up or down Wednesday, we got a two-fer as 20 points of the late reversal was regained in the last half hour.

Click here to enlarge.

Got Double Vision?

These 100 to 200 point intraday swings in the DJIA are becomming commonplace as confidence hits an air pocket, as greed and fear do a financial impersonation of the Keystone Cops.

Tell me about fundamental backdrop and rational investing. Things are happenning that are pulling back the Kimono Rationale of "investing" based on "traditional fundamentals". So I'm wondering, what are untraditional fundamentals based on?

The line in the sand has moved so much there's little left to gauge what the markets are moving on intraday. But emotion and manipulations are high on the list.

That means if you are a trader, more than any other time in the last four years, you have to be vigorous in adhering to your protective stops.

It means that if you are an investor, you need to follow objectively the stock market's trend.

Volatility may have blurred the distinction on an hour-to-hour basis and a day-to-day basis of how to determine the trend, but even in the midst of a parallax view of an accelerated tape the market still manages to conform to some underlying symmetry and principles that allow us to determine trend. Any principle is better than guesswork.

There are a few ways to determine trend. For me, Time Turns Trend. By that, I mean the behavior as the Wheels of Time turn price. For example, the Monthly Swing Chart on the S&P turned down on a break of the June lows of approximately 1484. Ultimately, that break saw the S&P test a weekly trendline rising from the June/July 2006 low. Got Double Vision?

Click here to enlarge.

On Wednesday, the S&P kissed the low of the high bar week (B). A break below a trendline (A) from the June/July 2006 low will trigger a Big Picture Rule of 4 Sell Signal.

Is the S&P tracing out a mirror image foldback this year with a June/July high? Or, is the S&P tracing out a fractal of the Feburary/March break? The similarity of the two breaks is uncanny. Watch out when and if that analogue breaks. The spring decline ran 14 trading days to its intraday low. The recent decline found an initial low on its 15th trading day. The patterns echo each other despite the chaos surrounding the incidents.

But, there are some major differences:

1. There are currently many more real distribution days then there were in the spring break.

2. The market internals---the A/D line and new highs versus new lows--- are more ragged now.

So, was the spike into Wednesday analogous to the S&P spike into March 21?

Click here to enlarge.
Was the spike into Wednesday (B) analogous to the spike into March 21st (A)? The current decline and snap back approximates the pattern of the February/March break and recovery.

In keeping with the Principle of Reflexivity, after turning its monthly chart down, the S&P has snapped back to resistance. That resistance is a wide band between 1484 and 1502. Alhough, 1490 looked like picture perfect resistance especially in as much as 1491 is 50% of the range from the July high to this week's low, 1502 is truly key pivotal resistance.

Click here to enlarge.

Why? 1502 is 180 degrees up from the recent 1426 low for the move.

1502 is also 90 degrees down from the 1541 June high, which appears to be the orthodox high as the July 12 breakout was a fakeout-breakout. On Wednesday, the S&P tagged 1503.90 and hit a brick wall. Despite the snapback at the close, which no doubt inspired more short covering and leaving the market potentially even weaker, the futures are down significantly this morning, underscoring the 1502 resistance.

If the trend is down,as many stocks are saying, the S&P has stabbed meaningful resistance right here as it kissed its overhead 20 dma as well as kissing the low of the high bar week.

Clearly, the market is at a focal point of recognition which will set in on any break of this week's lows. Why? The S&P has carved out an outside up week, which is bullish if the underlying trend is bullish. If the S&P turns the Weekly Swing Chart back down from here in short order it will trigger a Slingshot Sell Signal coincident with breaking a three-point trendline from the 2006 low and more than likely trigger a cascade of selling as a point of recognition sets in that the market is not in a simple corrective "adjustment" but a major decline.

That cascade should be triggered on a turndown of the Quarterly Swing Chart, which is the early April low, the low of the second quarter, at approximately 1416 S&P.

No positions in stocks mentioned.

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