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LET’S GET TECHNICAL

4 October 2009 by Cullen Roche 3 Comments

From Decision Point:

The market has begun another correction, but so far no serious technical damage has been done. The S&P 500 remains within the grasp of an ascending wedge formation, the dominant feature on the daily chart. On Friday prices hit their lowest level of the correction, but they remained above the support of the 50-EMA and the rising trend line. Next major support is at the 200-EMA.

As regular readers know, it is most likely that prices will break down from the rising wedge pattern, and I am inclined to believe that will happen in this case. Internal conditions for the medium-term are neutral to slightly overbought, and I think the market needs to get medium-term oversold before the correction will end. Also, it is October, and a certain amount of ugliness should be expected. I hear that a number of people are expecting a crash, but I see no evidence that would make me anticipate anything more than a normal correction.

dp1

The following Participation Index (PI) chart shows that the short-term market condition is oversold. This could signal a short-term bounce, or the end of the correction. The latter is unlikely because the market needs to get more oversold medium-term before another up leg begins.

dp2

Bottom Line: It is very likely that the S&P 500 will break down out of the rising wedge pattern soon. With luck a breakdown will be followed by a healthy correction, but we are in a bull market and I wouldn’t bet on anything worse than that.

Source: Decision Point

Cullen Roche

Cullen Roche

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Comments
  • Terry Steichen

    Only if you plot your chart on a linear scale are you still within the rising wedge. Use the (more normal) log scale, and we’ve got a downward breakout already.

    Also, the unsubstantiated statement that “we are in a bull market” seems kind of strange, given the widespread uncertainty as to whether that’s true, or if we’re simply in a bear rally.

    10/04/2009 at 7:07 AM
  • LZ

    “Nearly everyone was proclaiming a new bull market. Service were extremely bullish, and upside volume was running higher than at the peak in 1929.”

    - Robert Rhea “The Story of the Average”

    10/04/2009 at 3:57 PM
  • AWF

    Terry Steichen said:
    Only if you plot your chart on a linear scale are you still within the rising wedge. Use the (more normal) log scale, and we’ve got a downward breakout already.

    Agreed

    Plus we are near a 5% sell signal on the S&P500

    The Value Line Geometric (Equal weight) Avg has already given a 5% sell signal.

    The Long Term Monthly charts have been moving sideways for the last 2 months
    maybe something more than a mild correction is brewing.

    Did TPC say Earnings—What Earnings—

    Oh –I remember the “Less Bad” Hope and a Prayer analyst earnings

    10/04/2009 at 4:34 PM