Using Technical Analyis to Identify Market Direction, Pre-Market Commentary Nov 30 2007
Posted by Sean Hannon
November 30, 2007 at 8:32 am
The performance of the past three days was extraordinary. After a large rally Tuesday, I felt we were in the process of witnessing a quick, expected bounce. With Wednesday’s follow-up, the DJIA tacked on an additional 331 points. Add in Thursday’s 22 point rally and we have 568 points in three days. Looking at futures and overseas markets, the bulls are trying to extend their gains and drive the market higher. Impressive indeed. Knowing that markets do everything in their power to confuse and fluster, what should we expect going forward? Does this rally have legs or are we witnessing a last gasp for air by the bulls before heading underwater?
On a short-term basis, I will use technical analysis to help determine the path the markets take. When using technicals to make decisions, the size of the toolbox is limitless. Over time, I have found that the simpler the tool, the better. Therefore, I am a proponent of trends, support and resistance. One can combine these three factors to form triangles. When a triangle forms, the market tends to move toward the inflection point where support/resistance meets the downtrend/uptrend. From there, the stock will do one of two things. It will either break lower or break higher. At this point, we can determine the trend of the market and profit accordingly.
As an example, look at the weekly chart of Sears Holdings (SHLD). For two years, $135 served as key support. When the stock peaked in April 2008, SHLD began a clear downtrend. The stock moved within this triangle for 6 months and then broke lower. That break has set up a bearish formation that drove SHLD to an intra-day low below $110. Usually, the size of the triangle will identify the expected price performance after the breakout. In SHLD’s case, the triangle was $55 (190-135). From a break below $135, we can set a downside target of $80.
So what is the relevance to the current market? Looking at the three charts below, the DJIA, S&P 500 and Wilshire 5000 are all operating within descending triangles. Two days ago it looked like these stocks were breaking lower. This would have been unusual because we are still a few weeks away from the intersection of the downtrend and support. The monster rally over the past two days has pushed us back into the triangle. Currently, we sit near the downtrend. Further movement above this level could indicate the market is back in rally mode or it could not. Given the clear trend, my expectation is the market moves slightly down over the next two weeks. This will drive us toward the tip of the triangle and set up potentially decisive action. A break to the upside should allow us to retest the all-time highs. A break lower gives the potential for DJIA 11,400, S&P 500 1,280 and Wilshire 12,600.
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Good analysis. I think you could use the late October high as a starting point for the downward trend and you’d be led to believe we just broke out of the downward trend. You’re analysis is safer. I’m still leaning more bullish though.
When you’re talking about SHLD you say the stock “peaked in 2008.” I think you mean 2007 unless you have a time machine you’re not telling us about.
In regards to descending triangles, esp. on the $INDU chart, those last few days seemed so oversold that the market almost had to correct to revert to the mean. I’d suspect we trend between around 13,000 and 13,400 until the rate cut arrives, it’s only about seven trading days away, then we’ll see a pop back up.
DELL got bitchslapped by the market today, and if tech spending is slowing down that’s something to watch out for. Anyone figure out why RIMM dropped so big today? Almost 7%. Oh well, maybe I’ll BUYBUYBUY some on Monday.
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