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<<On Friday the DOW dropped 156 points for a total of -227 points (3%) in two
days. The DOW index price crashed through its intermediate term rising trend
line, giving us a clear indication that this is probably the beginning of a
trend direction change.>>
I wouldn't say we had crashed through anything but a short term lower
trendline on either the Dow or S&P. That tells me we have confirmation
(maybe) of the ending of a short term pattern. Nothing else yet. By a short
term pattern, I mean the Dow from 7/1. The reason I say "maybe" is that I
don't think the recent short term move up, technically started until 7/2.
Just prior to that date we had formed a small triangle, and the upper
trendline of that formation wasn't broken until 7/2. If you draw short term
lower trendline from 7/2 (at the thrust "start") to 7/21, you'll see the Dow
closed AT the trendline. Hourly (or less) data is best.
An intermediate term trendline that will be useful, was the upper trendline
on the Dow that runs 3/11/97 to 5/27/97. It was the break of this
established trendline in early June that confirmed the rise since then. As
we know, a trendline once broken, will provide resistance on the way back.
I've got that line a bit below Dow 7800, and would consider that
intermediate. For long term lower trendline support, I think we're dealing
with the lows of 7/96 and 4/97. At the moment that is at Dow 6900.
<<We should get a bounce and the intermediate term rising trend could become
the RESISTANCE line. OR, Monday, if the market bounces it could attempt to
jump back above its intermediate term trend line. Either way, I anticipate
this being the beginning of a HEALTHY 8-10% correction.>>
You may end up being correct, but with all respect, I think you are jumping
the gun a bit. There's no need to panic, and expect a Dow drop of 800
points. I need to make sure we have actually broken the short term Dow lower
trendline before making any moves, such as playing with secure long term
vehicles, like mutual funds. As mentioned in a post Friday morning, a 1.618
projection of the Dow drop on 7/31 and 8/1 was 7990. A 50% retracement of
the move up from 7/2 is the same level. We "bounced" just a touch below this
level, and as of yet have not revisited. Nothing too hair raising just yet.
Nothing out of the norm.
The entire pattern from 7/31 to yesterday's close, from an Elliott view, can
easily be interpreted as a three wave "Flat". The first wave down, the drop
on 7/31 and 8/1, the second wave is the slow climb back up, ending on 8/7,
and the final third wave is the drop on the last two days of last week. The
third wave , wave C, ending at a 1.618 projection of wave A. All normal, all
within the price parameters of a "Flat". Nothing to get excited
about......yet.
Now, if we do drop further Monday, down below Friday's low and trade there
most of the day, I'll probably switch funds late in the day, and with the
MACD on the Dow thrusting below its' signal line, I'll be scoping out puts.
The retest of Fridays low will be the critical test of the short term
trendline I think. If that three wave pattern mentioned has finished, we
should move quickly to the upside. If it hasn't, or we are in fact starting
that 10% correction you mention, I think the progression of breaking lower
trendlines will let us all know together. As of Friday's close, nothing has
disrupted my view to be long the market. I'll switch in an instant, but for
now it's "steady as she goes".
That my view anyway.
PJL
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