Intraday:
Well, we continued yesterday’s rally after the initial selloff and are continuing to follow Europe’s lead. We had a large rally at the open and steadily moved higher throughout the day. We appear to be setting up two possible bearish rising wedge patterns. The wedge with the blue lower trend line will likely breakdown sometime tomorrow. We could find some support at the upper trend line (the green line) off of yesterday’s bull channel. I expect, however, that the larger pattern will hold more firmly up until we either form another reversal pattern on the daily time frame or hit the upper trend line of our bear flag pattern.
Daily:
I have a lot to go over on the daily time frame, so bear with me. Our usual indicators are giving mixed signals once again. The ADX has moved to a bullish alignment, the MACD and histogram are in agreement and appear bullish at the moment, but the stochastic is still in a bearish alignment. I expect that our indicators will all move into agreement on the next up day which we should get tomorrow.
The blue lines on the chart depict a large bear channel which could prove very difficult to get out of. Any break of this trend line should be watched extremely carefully as it could be a shake out of more risk averse investors. We could also continue to trade within this channel for an extended period of time because trend lines get drawn, redrawn, extended, contracted, and expanded frequently. All of these things happen especially when volatility is high, as it is now.
Today we got confirmation of yesterday’s hammer reversal pattern as well as a new bullish pattern. This new bullish pattern is called a bullish engulfing pattern (the green circle on the chart). Engulfing patterns occurs when the day’s price movement completely “engulfs” or overshadows the previous day’s candle. This usually occurs with a gap in the direction of the previous trend. You could make the case that this is a “matching low” pattern (these two patterns only consider the real body of the candlestick) either way, they are both bullish patterns. I usually consider matching low patterns as a pattern of its own but when you have a clear engulfing I will call it a combination and consider it a stronger signal. At this moment I see no signs of impending reversals off of yesterday and today’s trend so I expect us to continue higher.
We continue to trade in this bear flag pattern (the red rising trend lines) and the longer we do so, the more confident I get that my current analysis is correct. When combined with my current wave counts (black zig sagging trend lines and red falling parallel trend lines) we can project what may happen over the next week or so (see older posts for further explanation). We appear to have completed sub wave 4 and have begun sub wave 5 of my overall wave 2, remember that Eliot wave says that each market movement occurs in 5 waves. Wave 2, of 5 large waves to complete this down trend!
If our current direction continues over the short term, we can reasonably expect one of three things to happen. One, we could reverse off of today’s bullish signals and daily patterns to thrust us lower (the first red falling trend line). This is very unlikely at this point but with recent market moves it is a possibility. Two, we could move up again tomorrow and form a reversal pattern around the Fibonacci level at the 1205 level (the middle red falling trend line). This could play out putting in the first lower high indicating an overall change in direction and send us lower possibly to challenge the ’08 lows. Three, we could move all the way up to the upper trend line of our bear flag pattern and slam into three converging resistance levels. These resistance levels alone could easily stop an upward movement but combined they are a steal door. This convergence of resistance levels consist of; 1, the upper trend line of our bear flag pattern, 2, the upper trend line of our bear channel, and 3, a Fibonacci level at 1235. I believe that this final scenario is the most likely to occur. Watch these levels and possibilities carefully and trade with caution.
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