Directional Analysis

Friday will be another volatile day caused by earnings from the evening before and economic data. The Wedges from all the indices are breaking but because they are breaking at the very tip of the vortex they have become less bearish. Like I had said at the beginning of the week, we needed some follow through in the selling this week to show me that we are having a correction. Now because of how long we have been above the down trend line from the top on 2007, this move has turned more bullish than I previously thought. Now I only expect to have a pullback instead of an actual correction, but I won’t know until at least next week. I will be watching all the Indices how they react to next week very closely to make a final assessment on the medium to longer term direction of this market.

We have been above the downtrend line from the 2007 highs for over two weeks now. The one thing we need now is decisiveness from the market. We keep pushing higher with no volume but eventually the momentum will bring all the volume on the side lines. So We have to see some sort of follow through on the selling otherwise this is just going to be a breakout and things will change completely.

With This week being the mother of all weeks as far as earnings goes, I expect the market to be all over the place but still range bound. The highs from the Reverse Symmetrical Triangle ( E ) have not been taken out yet and what I believe is wave two has not been violated yet (refer to 10-18-10 video).  The main charts I am looking at are: the dollar, which seems to have created a short term bottom, and is trading opposite to the market. The VIX has also created a short term bottom and is in a bullish falling wedge. Another chart I’m looking at is the semiconductors which I believe have peaked, are on the verge of breaking down from a bearish rising channel. Finally, The Financials that have made a turn at a key resistance and what I believe to be a bearish continuation Slim Jim pattern. If you look at the market as a big ship, the financials are in a way an anchor that is on the bottom of the see. The problem with is that as long as the anchor is not being pulled up the ship will eventually stop moving and possibly get severely damage because of it. The markets are still trading above key technical levels without any volume follow-through.  Because of this, the Bulls and the Bears are still in a battle with the Bulls having a slight advantage but with one foot still on the edge of the abyss.

We cannot call it a correction just yet. Like I have said before the type of patter that we are in is psychologically draining patter and until the market doesn’t take out some of the key areas of support, in the shorter term we are still bullish. First we have to close under the infamous 1131’s area in the S&P500 cash index. By then we would have taken out the main line of the rising wedge we have been in for the past couple of months. After that, we are looking for the intermediate term of the bear flag (zig zag pattern) created the past four months. And lastly, we have to take out the neck line of the longer term Head and shoulders pattern created the past year. So like you can see we have quite a ways to go to really call it a for sure thing. So far we are hitting the lower trend line of the rising wedge and bouncing off of it, of course this is intraday so by the time you are reading this we could have taken it out. The bottom line is there is a systematic process, which I follow diligently, and that is the only way to create wealth in this industry and keep that wealth.

What does it take for this market to correct?  We will only know that answer only when it actually happens. But what I can tell you is only what I see so far in the technical. There is a new pattern that has been created in the intraday charts, called reverse symmetrical triangle. This is the one pattern that I personally dislike the most, because it makes people crazy.  The reason is because the pattern makes higher highs and lower lows which psychologically is draining. Another reason is that it could be a continuation pattern or a reversal pattern, but most of the times we won’t know until it back test or breaks down. This one I believe is a reversal pattern and these are the reasons why. The moved up has happened with negative divergence on the main indicators and oscillators. The Volume has been contracting on the way up. Price is hitting the top of the range of the bearish channel. Although the down trend line from 2007 has been violated, it has not been with convincing volume, therefore a possible reversal still looms. With all of these reasons still on the table, we have to take in account that this move up could be hatch away very easily with one good down day. I am starting to take some of the bearish reason off the table as they get violated, but until there is not conviction I stay cautious on my positions.