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The Outside Key Reversal Day?


What Thursday's market action really means.

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After yesterday's discussion of the "all-important" inflection point (Time to Revisit Stop-Loss Areas), I thought it prudent to address the ending results, and what this may mean for the remainder of 2008.

First of all, there's a lot of technical significance placed on what transpired. When my firm put out the report -- at noon -- the Four Sisters were just heading down to their lows of the day, and the S&P 500 (SPX) cut through the old reaction lows of 840. I must say, it looked pretty dismal.

Click to enlarge.

The chart, in reality, does not do justice to the actual intra-day breakdown through the past lows set on October 10th - exactly 1-year from the market's peak close at 1,565. Yet, as a market technician, I did realize many bottoms are formed with an undercut of the lows. The trick is to determine if it's going to reverse back up, or continue the downward slide.

This is where the "Declining Wedge" formation gave me what I call the "Oh Crap" level - otherwise known as the shakeout stopping point. After the original breakout on October 28th -- discussed in my last report -- the market hit resistance at 1,007: Markets hate round numbers. As the market tumbled from the November 4th high, I waited for the "retest confirmation." The confirmation came like Santa down the chimney - an Outside (Bullish Engulfing) Key Reversal Day.

There's been a lot of talk over the last 24 hours about what happened. What we really need to be focused on is what this means,, and where we may potentially go from here. The following 1-year chart of the SPX depicts the possibilities.

Note the 2 downward trend lines since the October 11th peak (in red). What's important is the second downward sloping red line that converges with a horizontal resistance around the SPX level of 1,160 to 1,170.

Click to enlarge.

The next important visual is the prior resistance discussed; the November 4th high of 1,007 and the next major horizontal resistance. With yesterdays bottoming formation we can make a few calculations – "Measured Moves." This is where a pattern is formed - and if it's broken through, then the subsequent move is likely to move equal distance.
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No positions in stocks mentioned.

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