Intraday:
We started the day with a sharp selloff following Europe’s lead down again. Yesterday we were on the verge of forming a bearish alignment of the moving averages and with today’s price movement we got it. We were in an orderly bear channel for the majority of yesterday’s session and probably would have continued in that formation had Europe not fallen so sharply as we broke down out of this pattern right at the open.
After the break down of yesterday’s bear channel we began setting up a bullish falling wedge. We followed this pattern and broke out right around the European close. After breaking out, and I mean immediately, we slammed into overhead resistance at the 10 period MA (the blue line). Having hit resistance we then proceeded to back test the upper line of the pattern and gradually drifted lower.
Following the failed break out of our falling wedge pattern we were forced to redraw our trend lines. After redrawing trend lines we found a new bullish falling wedge. In this new falling wedge we had a much tighter price range moving into the break out of this one. This new wedge also failed as our moving averages had formed heavy overhead resistance which we could not surpass for most of the day.
In the last hour of trading we saw another attempt to break out of this downtrend. Over the last half hour we poked above the 10 period MA and made a quick attempt for the 20 (the red line). After hitting the 20 period MA we reversed sharply and retreated back down to the 10 period.
Daily:
On the daily time frame we two out of three indicators are Bearish. The MACD is weakly holding on to bullish signals but moved into a position that makes bearish signals not only a possibility but almost certain. The ADX and stochastic are continuing their bearish alignment and have not shown any signs of reversing yet.
Having gone over the indicators in a general sense I want to tell you about divergences. We have set up and are exhibiting divergences on both the MACD histogram and the stochastic (indicated by the black lines within the circles on the indicators. This usually occurs when overall momentum is contrary to the price.
There are several types of divergences but I won’t bother confusing you and I will keep it simple by using the words divergence and convergence to describe the patterns. When in an uptrend, i.e. prices are moving upwards, and your indicator moves in a contrarian direction you have a divergence and prices tend to eventually move in the direction of the indicator (this is what I have pointed out on the chart). This occurs in both uptrends and down trends and can be recognized by the “divergence” of price and indicator. On the other side, that is the other type, we have what I call a convergence. A convergence occurs when price and indicator, what else, converges. This second form usually is an indication of a top or a bottom as it indicates strength at a turning point and can occur in uptrends or downtrends as well.
Our bear flag is setting up beautifully. Paired with our indicators either being in a bearish alignment, setting up a divergence, or both we can reasonably expect to break down out of this pattern and move to challenge the 1100 level and quite possibly lower. When you consider the above information and recognize that we got confirmation of yesterday’s reversal pattern and that downside volume is beginning to pick up you have to conclude that the best guess (that’s all that market analysis is) would be further downside movement.
All of the above information is culminating with my wave counts to play out. According to my wave count we completed a wave 1 with the 1100 low and have just finished the sub wave 5 (the red zig zagging lines) of my wave 2. If my wave count is indeed correct, we are looking at a large wave 3 down with another rally attempt for a wave 4, possibly with another bearish formation (i.e. a rising wedge, or even another bear flag) before making one final push lower to form a wave 5 before moving back into a bull market. This could all fall apart if Bernanke comes out with some form of QE or if there is some extremely good news either about jobs or out of Europe.
Weekly:
On a weekly time frame, 2 out of three of our indicators are in agreement. The ADX and Stochastic are in a bearish alignment but the MACD histogram is holding on to a series of upticks. Even though the MACD is showing mixed signals (i.e. histogram up but signal lines down) we have several signals that we are headed lower next week.
With potential bearish signals on all three indicators paired with confirmation of a reversal pattern off of our last up week, we can be confident that the markets are heading lower. We will likely pause temporarily at several possible levels of support(these levels are indicated on the chart by the red horizontal lines and will provide insight to the end of this bear market and potential reversal points to put us in a new bull market). These levels of support are, however unfortunately, levels that we haven’t seen since last year. Further beyond these levels we have no support until the 666 bottom from the ’08-’09 break down.
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