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Stock Market Retests H&S Neckline, Perfect Setup for Opening Gap Down

Stock-Markets / Stock Markets 2010 Jul 07, 2010 - 03:26 AM GMT

By: Anthony_Cherniawski

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleU.S. stocks gained, with the Standard & Poor’s 500 Index rising from a 10-month low, amid speculation earnings growth will help equities rebound from their lowest valuations since the bull market began in 2009. (LOL!)

The S&P 500 climbed 0.5 percent to 1,028.06 at 4 p.m. in New York after jumping 2 percent in the first hour of trading. The Dow Jones Industrial Average gained 57.14 points, or 0.6 percent, to 9,743.62 to snap a seven-day losing streak, its longest since the financial crisis in 2008.


Cleveland Fed on GDP - Dreary Outlook

(ZeroHedge) The Cleveland Fed issued a report that looked at the historical relationship between lagged GDP growth and the steepness of the yield curve. They compared the ten-year with the three-month bill yield. They used this information to make a probability estimate for a double did recession. Not surprisingly, they concluded that the probability is only 10%. I would take that bet. If anyone in Cleveland is interested, let me know.

99 Stocks Account For Half Of Day's Trading Volume As Liquidity Concentrates In Ever Fewer Stocks

(ZeroHedge) The attached liquidity analysis by Abel-Noser indicates that the US stock market has now become a concentrated pool in which just the top 99 stocks account for 50.09% of total domestic trading volume. In June, the top 20 stocks accounted for 28.94% of all domestic volume, an increase of 2.2% over May's 26.7% and a record. The HFT algos are increasingly trading less and less stocks in their attempt to corner just the most liquid stocks. Indicatively, the top 978 names represented 90.01% of total domestic volume, while the remaining 17,597 accounted for just 10% of all dollars traded.

VIX tested short-term Support, makes a right shoulder.

-- VIX tested short-term Trend Support at 28.95 as I had speculated last Thursday and completed a right shoulder of an inverted Head & Shoulders pattern. Today is considered the last day of the positive seasonal influences. What follows is what is considered the four worst months of the year in the stock market. The CBOE Put-Call Ratio for equities ($CPCE) rose to .99, as retail investors didn’t like what they saw. The pros became more bearish as $CPCI rose to 1.64 at the end of the day. The 10-day average remains bearish at 1.51. The NYSE Hi-Lo index closed up 3 points today to -41. The Hi-Lo index remains at a low ebb, but could become extreme.

SPY attempted a retest of its Head & Shoulders Neckline.

Action: Sell/Short/Inverse -- Today SPY attempted to retest the H & S Neckline at 104.00. While it temporarily overshot to 104.37, there was too much selling pressure at 104.00. This constituted a 26.26% retracement of the last two weeks’ decline. Tomorrow is a pivot day and SPY (all equities, in fact) have a perfect setup for a gap down at the open tomorrow to kick off its third wave. I recall my trading activity in 2002, where I was surprised by a 3.77% rally on July 5th. It put me off my game for a couple of days as I was trying to figure out where it came from. Probably end-of-quarter retirement plan contributions.

QQQQ is heading for its own neckline.

Action: Sell/Short/Inverse -- QQQQ completed a 27% retracement today as it prepares to challenge its Head & Shoulders neckline at 41.00. It is also the lower trendline of the Broadening Top. A down-sloping neckline has higher probabilities for success and portends a larger decline, according to Thomas Bulkowski’s Encyclopedia of Chart Patterns (p. 290). If the pattern is followed through, the new target for this decline is 31.57. By the way, the average decline once the Broadening Top is violated is also 31.57. The NDX attempted but did not succeed in retracing to its neckline at 1775 today.

XLF made a second retest of its neckline.

Action: Sell/Short/Inverse -- XLF made a 32% retracement as it retested its Head & Shoulders neckline today. The next target is the lower trendline of the Broadening Top formation (in all likelihood) tomorrow.

FXI retraced 52% to hit short-term Trend Support.

Action: Neutral -- FXI retraced 52.65% of its two week decline to its short-term Trend Resistance at 40.28. This is the best retracement of all the ETFs I follow. Yesterday was its Trading Cycle low, so if it can manage to overcome short-term Trend Resistance, it is bullish. Otherwise, I await a breakdown below intermediate-term Trend Support to become bearish. $SSEC closed at 2409.42, nearly 100 points off its low. It also pivoted on Monday, so I remain stuck on the giant triangle that I have been following for some time. It poses a dilemma, since there is nothing but bad news coming out of China.

GLD may be ready for a brief retracement.

Action: Sell/Short/Inverse -- GLD completed an impulse in the daily chart and may be ready for a brief retracement. Current overhead resistance is at 117.40 and 118.86. The 38.2% retracement is at 119.07. I do not have any confidence in a strong retracement, although it could happen. What I do have confidence in is that GLD has now joined equities in what may also be a crash pattern in GLD. I do not envision a retest of the Broadening Wedge trendline at this time. The retest rate of a Broadening Wedge is only 21%.

USO broke below intermediate-term Support.

Action: Sell/Short/Inverse -- USO made a 27.8% retracement of its decline from 36.04, then gave up most of its gains. Although USO is very oversold, it can remain in that condition during the entire duration of its third wave. That is why many trading blogs are still looking for a rally, since they follow overbought/oversold indicators, which currently suggest a reversal. The cycles suggest otherwise. I have drawn in the neckline for a complex, triple-headed Head and Shoulders pattern. Once below 30.93 the minimum downside target is 19.67, while another calculation suggests as low as 17.80.

The reversal pattern in TLT looks ominous.

Action: Sell/Short/Inverse -- Last Thursday I reported a reversal pattern in the hourly TLT chart. Today the reversal pattern appears in the daily chart. This constitutes the best place for taking profits in an ending pattern. Friday’s pivot gave us the initial decline. The follow-on decline may take TLT as low as its intermediateterm Trend Support at 97.77. In addition, I am expecting a Primary Cycle bottom by the end of this week, which implies that all cycle supports may be broken by then. See ZeroHedge article.

UUP is ready to pivot.

Action: Buy/Long -- Tomorrow is a pivot day for UUP as it settled on its 38.2% Fibonacci retracement today. Today’s action may give us a new seasonal cycle, since this one has lasted since November 25, 2009. This has been an unusually long cycle, but the dollar seems to be the only asset left in rally mode. The pivot in UUP implies the beginning of a third wave higher while equities, bonds and commodities go much lower.

Tony

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As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

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Comments

Jules
07 Jul 10, 11:36
Gap Down?

What happened to the gap down ?

Stock market rallied from the open !


The Chairman
07 Jul 10, 22:26
Third wave kick off fizzle!

"Tomorrow is a pivot day and SPY (all equities, in fact) have a perfect setup for a gap down at the open tomorrow to kick off its third wave. I recall my trading activity in 2002, where I was surprised by a 3.77% rally on July 5th. It put me off my game for a couple of days as I was trying to figure out where it came from. Probably end-of-quarter retirement plan contributions".

I bet you are wishing you didn't write that after SPY gained 3.15% today.. How's that gap down working out for you?


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