Sunday, March 04, 2007

The Past is Prologue

One thing I hate to hear is “this time it’s different” because no - it isn’t. It might not be exactly the same at the detail level but in the larger sense it will be the same.

Here is the DIA, the replica of the Dow Industrials -

Start at the bottom. Notice how the ATR increases and then decreases and how this somehow relates to what is going on with the prices. Expect that to happen – the ATR will increase some more and then eventually roll over and begin to decrease. Now move to the RSI – it will be extremely volatile – expect it to suggest a bottom several times in the next several weeks. But until the ATR rolls over and starts to decrease they are just head fakes. Notice that the volume will return to normal very quickly – the amount of volume we had last week is unsustainable – eventually no one is willing to sell their shares in the quantities required for such a volume spike. Note how any up weeks (a) will have longer tails than normal and when the all-clear is sounded you should have something that looks like (b) – I.E. going up right out of the box. And notice how the price should come all the way to the 90-EMA before turning back up. This last mini-correction took 11 weeks to sort out. In that 10 weeks there were three clear-cut up weeks and two DOJI weeks before it was cleared. The SPY/SPX looked pretty much the same.

Here is the IWM -

You see how it is very much like the DIA. It also hit the EMA-90 before it cleared. The elements marked “a” and “b” were exactly the same.

And finally the Q’s -

The tech took an extra week to clear and actually went down through the EMA-90 but it started from a much closer point. At any rate the same basic principles apply – low RSI several times and then an ATR roll-over. I’ve also annotated on this chart that period from November to the present where the tech market was flat - I posted about that back in December and mentioned that I was looking for a break out. What we got was a breakdown.

I’d expect another down day on Monday and then a little bit of relief for the rest of the week. The retail trade is shell shocked and not fearless so don’t expect a lot of action. But the 401K money comes in beginning Monday and it has to be put somewhere. That’s the law. Then we could have a couple of down weeks and then who knows.

Take your trading a day at a time and try not to keep one eye on the screen all the time. And if we do get an up week don’t start breathing easy until you see that ATR roll-over and start back down.

1 comment:


What will the future hold.