Tuesday, May 04, 2010
Breakout or Shakeout ??
Here are two charts I find interesting. The lower one is a 30 minute bar chart showing day session e-mini trading. The upper one is a five point box, one box reversal point and figure chart showing 24 hour e-mini trading.
On the lower chart you cans see that today the market has broken below its two April low points (red dash line) on high volume. This sort of action coming as it does after an extensive trading range had formed has a great deal of bearish potential. How much?
Looking at the point and figure chart you can see that this breakout could easily to carry the market as low as the 1080 level according to the point and figure count I have illustrated. Even if you are not a believer in point and figure counts, the size of upper trading area on this chart is itself cause for concern. It is the biggest congestion area on the way up from the February low and is almost as wide as what I take to be the base that formed at the February low. This means that it could well indicate the reversal of the uptrend from the February low.
But does it? I don't think it does and here is why.
First of all, I think the move up from the February low will be comparable in length to the two previous up trends in this bull market. These each carried the ES up about 270-80 points. A move of that size from the February low would continue to 1320. Secondly, the 10 day moving average of the daily count of advancing issues on the New York Stock Exchange reached a peak in mid-March. In a bull market this means that a end to the advance from the February low should be expected sometime between mid-May and mid-July. Third, the drop from the 1216 top of April 26 has only carried the market down about 50 points. This is quite a normal drop within a bull market swing and indeed is the first break of more than 30 points within the rally from the February low at 1041. Based on historical behaviors the move up from the February low is likely to experience several 50 point corrections before it is complete.
So I am going to bet that this break below the 1177 trading range low will prove to be a high volume shakeout. The market is close to the lower channel line I have drawn. The 1163 level is the midpoint between the 1587 bull market top of 2007 and the November 2008 low at 739. I think the market will drop a bit lower into the green oval target zone and within a few days begin a move to 1270. The January top is at 1148 and I think this will also serve as support should the 1163 midpoint be broken.