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As I posted last night, I was looking at potential P&F patterns on three index ETFs, and the SPY triggered a bearish Triple Bottom today. The DIA also fired it’s common Double Bottom sell signal, but as I wrote, I’m not that interested in Double Bottoms or Double Tops for that matter.
With the SPY triggering a Triple Bottom, there is a possibility of a “recoil” into the breakdown area. Not on an intra-day level, but over the next week or so. A high percentage of Triple Bottom breakdowns pullback into their previous range before they descend further….assuming conditions warrant further price decay.
Obviously, a pullback into the breakdown area is not guaranteed. A bearish Triple Bottom breakdown is a high probability pattern, but it does fail. Proper money management and stops are a must…especially this kooky trading environment. Basics, basics, basics.
Price is still well above its 45-degree long term trend-line (blue line). The L/T trend-line also matches supports the July 2010 low at 100.00. For now at least. Until that is violated, I view this as a pullback/correction of the major 2009 bull trend. Which means if we see further price decay, I’ll look less at buying dips and more at shorting the swing highs.
Summary: the P&F Triple Bottom is a breakdown/correction in the bullish trend that began in 2009. I’m not fully bearish until the L/T trend-line breaks, but I’ll widen my nightly swing short scans to include that side of the trade more.
We shall see if the bears are really ready to take control of this market again. Good luck, good trading and be well.
There are already a lot of charts up tonight taking a look at today’s sell off and where we stand. I just wanted to quickly look at three Point and Figure charts for the DIA, SPY and QQQ.
The DOW ETF, DIA, is close to a Double Bottom sell signal. Double bottoms are known as “common” Point and Figure (P&F) patterns and occur frequently. Because of their commonality, I use them only as Stops and not as a place to begin a new position (in this case, a short). We are still well above the long term 45 degree trend-line so a sell signal here may mean a long, painful grind toward the trend-line or not at all. It’s just too common of a pattern to form a firm bearish or bullish bias.
Unlike the DIA, the S&P-500 ETF, SPY, is very near triggering a bearish Triple Bottom breakdown at 124. This wouldn’t be a good signal if you’re a long side only trader. Triple bottoms, as I have written before, are fairly reliable patterns when applied to stocks and ETFs. Obviously, not all Triple Bottoms lead to a profitable short or trend changes, but over time, a sizable number do. 124 SPY will be important to watch over the next few weeks.
The Nasdaq-100 ETF, QQQ, is in better shape, but also staring down a potential Triple Bottom breakdown at 53.00. If both the SPY and QQQ trigger their Triple Bottoms, it’ll make me pretty cautions on the long side and I’ll probably favor shorting down to their long term trend-lines (blue lines).
Time to take another look at the percentage of stocks trading above their 50-day simple moving average on various U.S market indexes. It’s one way to view short term market structure and look for potential oversold buying opportunities. Great way to compare previous sell offs…strengths, depth, etc. Overbought opportunities? Not so much. These pigs will run overbought until they’ve rung every last dime out of the short sellers…and then *BOOM!*. Sell off.
Let’s get into the charts…
Percent of DOW stocks trading above their 50-day Simple Moving Average
Percent of Nasdaq stocks trading above their 50-day Simple Moving Average
Percent of Nasdaq-100 stocks trading above their 50-day Simple Moving Average
Percent of S&P-500 stocks trading above their 50-day Simple Moving Average
Percent of NYSE stocks trading above their 50-day Simple Moving Average
Even though stock markets are considered fairly random to most participants and outsiders, if you step back from the intra-day fray and observe the market cycles from afar, they function much like coked up metronomes. The best time to look at market cycles is when they are testing their extremes, so let’s get to it…
One of the more cyclically contained indexes is the S&P-500. Let’s take a look at the recent run on a 2-year chart.
Over the past two years, the downside runs have been contained within a 2 standard deviation of about 4.00. The most recent run is only the third time in two years that we have extended beyond a 4-day down move. Does this mean that Monday or Tuesday will automatically be an upside day? Of course not. It simply points out that the probabilities of an upside day happening soon strengthen as we extend beyond “normal” cycle boundaries.
Simple mean reversion. Same thing that happens when you grow up on Rock music and venture off into 50’s Jazz for three months only to viciously snap back with three drunken nights of Led Zeppelin, ELO, and KC and the Sunshine Band.
Even though I write systems that feed off market cycles, cycles break or extend or revert to useless “noise” often. For an index that has a tendency to sprint into long runs, look at the Nasdaq 100.
Damn thing will take off when it wants too without any warning and then drop right back into a normal 4-day cycle. *Poof!* No respect. It’s important to look at cycles, along with much of Technical Analysis, as highly probable trading areas with an intractability that appears just when you’ve gotten comfortable. Keep moving…always keep moving.
The DOW doesn’t have neatly contained cycles. It’s pretty crappy actually.
But as we can see here, we’ve reached an extreme that has only been tested three times in the past two years as well.
The Nasdaq Comp is one of my favorites. Lovely 6-8 day upside runs and a well contained 4-day downside cycle.
We’ve only breached the 4-day downside cycle once in the past two years and we’re within normal boundaries currently. But as you can see, the upside on this index is awesome for trend traders.
Lastly, I’ll look at the NYSE.
Currently, we’re very stretched to the downside…testing an area that has only been tested once before in the past two years. The NYSE Comp is noisy for the most part, but it does run rather well in 4-day up and downside extremes. It’s worth noting when it breaches the 4-day on either end.