First I want to make it clear that I am a daytrader, not a swing or investment trader, so I seldom look at charts longer than ten days. But I figure I am going to need to invest in longer term prospects in the future, so here is my first stab at analyzing market movement over the longer term (swing length). I see two identical patterns forming in the NYSE composite index. (I use what I call the NCI because of the larger basket of stocks - 2000 - than the SP500.) The orange line represents strong support. I don't believe the January spike below it is a legitimate indication of market sentiment, but a result of that French rogue trader. The following two failed attempts to penetrate the support line seem to confirm this. The two yellow lines show the same penetration pattern. They begin with a down move. And then another down move. And then a third down move which finally breaks through. The NCI then touches it from the bottom and heads down to the orange support line (and rogue spike the second time). We also have two pennants formed. The breakout from the first pennant came on a Tuesday and the second breakout looks to also be coming this Tuesday. (Tuesday is usually a high range day, whereas Monday is generally the lowest range of the week.) The SMA20 on the 15 year / monthly chart was penetrated in January, but if it is reached by the end of this month a February confirmation of a bear market would evaporate (meaning the market is consolidating instead). From the first pennant breakout we see an 800 point rise before a retracement. I expect we will see a similar rise from the second pennant breakout. Notice also the shrinking daily ranges in both pennants (purple = <1%, blue = 1%-2%, gold = >3%). Two confirming indications of a bottom back in January were the VIX spike and a spike down of NYSE stocks over the 200 day SMA. So I expect that the close Monday will stay within Friday's range (the two previous Mondays were both purple... <1%). But watch for a major long breakout on Tuesday that will begin a rise of the NCI up close to 9800 before a major retracement. OK I realize that I am really reaching out of my comfort zone on this one. And I won't be putting any money on it (well maybe a little). But I want to know what the local index swing traders think of my analysis. Have at it...
The first breakout to the upside you see there was caused by fed rate cut on that day. For history to repeat itself, you need an event of similar or stronger magnitude.
That's a great point I had not considered (I didn't know that was a Fed day - my bad). But it does bring up a question that has always nagged me - how to incorporate news into technical analysis? What caused that spike at the end of Friday's session? I've read it was a planned bailout of bond insurer Ambac. It seems hard to believe that the the whole market saw this as market-moving news on a late Friday afternoon. In my other thread SP500 or NYSE Composite?, I noted a double bottom with volume at support after a healthy 2.5% drop for the NCI and asked if this meant a reversal. So did the news just facilitate what traders wanted to do anyway, or was the news the sole reason for the rise? Or did the news just add intensity to an inevitable rise? I admit I was being rather presumptuously bold in the specificity of my prediction (intentionally, I might add - to get just the sort of response you gave - thank you). I wanted to see where the chinks in my armor were, if in fact I'm proven to be wearing any at all. But beyond this question, even if Tuesday does not spike up, what do you think of the pattern repetition indicating a rise in the market? Does the pattern indication of a long breakout fail just because there may not be an equivalent news-driven catalyst? Is the market sentiment bias up, based on the fact the market reacted up the last time this pattern showed itself, or is the pattern inconsequential to the pressure of the news? Am I trying to be too nuanced here?
Something else of interest is the same question I am asking in my other current thread SP500 or NYSE Composite?. In that thread I am exploring which index more accurately portrays overall market sentiment for daytrading DIA. I am comparing DIA with the Dow 30, SP500 and the NCI. So far the NCI has produced more profitability and less risk within the parameters I have set. And now here with these longer termed charts I notice that the patterns that are so very clearly repeated in the NCI are barely recognizable, if at all, in the SP500 chart.
Well yesterday had some more positive bond insurer news, but hardly earth-shattering. Today the news was terrible - inflation is on the move, consumer confidence is down, house prices are down, oil is up and Google is down. But positive market sentiment has shaken it all off and pushed the NCI higher for the third day in a row. And that was before the Fed comments that they did not expect these inflation pressures to persist. The NCI even pushed through its first real test since the breakout began - resistance at 9280. On a lighter note, CNBC is all a-twitter about why their reporting of negative news has been ignored by the market - priceless! They are now saying that an IBM announcement of a stock buyback is the reason - must be one hell of a buyback. After three big moves up I expect a market, starving for some profit, will take some late today or tomorrow.