BANG: Right Down to Support!

By: J.D. Rosendahl | Fri, Jan 29, 2010
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The Risk Chart:

On January 20th, I wrote, "The Risk Chart". In that, I essentially stated, "This is where I expected a sell off to begin. The Risk Chart was suggesting there was an elevated risk level in the markets, and gain protection strategies should be taken". The interpretation of the Risk Chart so far has been dead right.

IBM (Big Cap Stocks):

On January 21st, I wrote, "What Are Some Big Stocks Telling Us: Follow up on IBM". I suggested the reader keep an eye on IBM because it's a key component of the DOW, and a correction back below major resistance would be bearish for IBM and the markets. This week, IBM proved that view to be correct so far.

Below is the weekly chart of IBM

IBM is a significant component of the DOW, and the stock has rolled over right at significant resistance levels, which aided the sell off in the DOW. More interesting is we have two black bars down. If next week proves to be another black bar down closing near the lows, a 3 Black Crows pattern would be in place, which on a weekly chart would be quite bearish.

Note: I rarely trade in IBM, nor do I have a position in it now, nor am I recommending one. Rather, I like to keep my eye on IBM because it's such a key component of the indexes. What's the old saying, "As IBM goes, so goes the market"!

Below is the weekly chart of MSFT

Like IBM, MSFT has failed right at significant price resistance. The MACD has rolled over. And it too, has 2 Black Crows and also worth keeping an eye on.

Below is a weekly chart of AAPL

The weekly chart of AAPL reflects the stock is struggling at resistance levels with bearish divergences on both the RSI and MACD.

What's interesting about all 3 stocks is they reflect something that is very common among many stocks, especially the Big Caps. A lot of stocks have rallied into major resistance levels where they are failing and reversing. Technically, that's typical after a significant move, and a place where you would expect stocks to fade, which supports why the stock market is off sharply in two weeks.

The other thing that is interesting is that both AAPL and MSFT had very good earnings announcements and yet, the stocks have sold off. I have a friend who bought AAPL at $88, and when we discussing selling it 4 days ago, he said, "what is the probability of trouble considering record profits, great existing products, expanding markets, and great new products coming out"? My answer was this, "The stock may already have all that good news priced into it since the market is a forward looking mechanism, the technical picture on AAPL reflects several negative items, and if the market is rolling over into a larger Elliott Wave correction, all stocks will go down. I further stated, "All assets look great right at a top, remember real estate"?


On January 22nd, I wrote, "Has the Fat Lady Begun to Sing". In that, I discussed the 3 Black Crows pattern the markets had made which is a bearish formation after a significant move higher, and preludes to lower prices. So far, the 3 black crows have proven to be bearish for the markets.

On January 25th, I wrote, "Next Support Area". In that, I suggested we should expect the markets to test that support area (10,100 on the DOW and a zone of 1075-85 on the SP500) in the near future. And this weak we did. I also stated, "The move down looks impulsive". It still does.

Above is the daily chart of the DOW, and we actually closed below the initial support level. Notice the RSI still has a little more room to strike 30 (oversold). It doesn't have to, but if this down move is strong it probably will. If the markets are to have a small wash out next week because the Big Caps continue to roll over the next support area is 9700-9850.

Above is the daily chart of the SP500. It has closed right in the support zone, and right on top of gap support. The RSI has room to move lower, and if the markets do roll over next week the next level of support is 1035.


The daily chart of the $VIX is below.

The daily chart of the $VIX reflects a bull flag (wave 4) in what looks like an impulse (5 waves) move. A break above the flag pattern would be initial confirmation. The daily $VIX is hinting to possibly further weakness for the current move lower in the markets.

The weekly chart of the $VIX is below.

If we look closely at the bottoming price action on the weekly chart of the $VIX, we see a candlestick pattern (Morning Star). This is a bottoming pattern.

Morning Star: Candle 1: An extended black real body. This pictorial proves the bears are in command (which is bullish for the stock markets because they trade inverse to the $VIX). Candle 2: A small real body that doesn't touch the prior real body. The small real body means sellers are losing the capacity to drive the market ($VIX) lower (which means the bulls or buyers are losing the capacity to drive the stock market higher). Candle 3: The concluding candle of the morning star is a white real body that intrudes deeply into the first session's black candle. This is the indication that the bulls have seized control (of the $VIX, and inversely the bears of the markets). Japanese Candlestick Charting Techniques, second edition, page 97, Steve Nison. Italicized is my commentary to reflect the inverse relationship in the $VIX and the markets for clarity.

The above chart of the $VIX reflects a weekly bottoming pattern, which at a minimal is suggesting the correction from the recent top should be greater than those of recent past, and it could be something much larger.


In summary, for the first time in while, the last two weeks have produced some bearish technical indicators worth watching, and so far, the markets have sold off confirming those indicators to be accurate. It also initially supports the bearish Elliott Wave view, "The top is in".

Since the very top, those indicators have guided me into entering short positions for my parent's trading account because it seemed like the low risk trade, and we have some easy gains. The entire way down I have watched the intraday price action of the markets to suggest when to close some positions and when to re-load or add new ones, as the market has continued to reflect further downside all week long.

I took 35% of my short positions off the table going into the closing hour this Friday. Essentially, I don't want to have a full short position going into a weekend, nor do I want to get caught should the markets bounce. That's just risk management, and that's what we are all about.

I'm not recommending shorts as it doesn't fit the investment profile for most. I am recommending that investors managing risk, and weigh the decision to be long. I still believe its time to be protecting wealth, and protecting any short term trading gains for the long side.

I'm also not forecasting the markets to go lower next week even though I feel it is plausible. At some point, the market will have a bounce; a bounce that I feel will be some kind of consolidation pattern and reflect the markets have much further to go on the down side.

Lastly, for the markets to negate the current Elliott Wave bearish view, the markets and Big Cap stocks will need to rally and rally big. That seems like a low probability at this junction, but that is the only thing that would negate the current Elliot Wave count, "The market top is in". So, when we get the next move up, it will be very important. If it turns out to be a wave 2 of B higher, which would fail to make a new high, that is another confirmation of further downside, and the further we go down, the more we confirm the bearish Elliott Wave count.

Hope all is well.



Author: J.D. Rosendahl

J.D. Rosendahl

J.D. Rosendahl is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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