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Summary for Week Ending 19th July 2003
This week saw a continuation of the listlessness that we
have seen over the past few weeks. The only item of news that I found
surprising was the story that the US came out of recession ages ago and
that the FED may decide to move rates below 1%. This is of course the
problem with modern monetary policy when you only have one weapon in the
arsenal. If the economy fails to respond, it has more to do with the psychology
of the masses than anything to do with commonsense, and as we all know,
commonsense and financial markets are mutually exclusive.
Last week we were looking for a lower high pattern in the S&P to give
a insight into the future direction of this market. Primarily a 2 bar
swing chart was called for to filter out all the jiggling that has been
evident in the past few weeks, and we got this on Tuesday and Wednesday
as consecutive declines after the run upwards on Monday. It is Mondays
action that is the most important as it created a Double top formation.
The problem with this pattern is that at present it has occurred at the
end of the run for this cycle and this is technically the worst place
that one can expect to see a double top. The reason for this is simply
that double tops very rarely end a movement and are much more reliable
as a false rally pattern off a higher high. That is, a lower double top
is technically more reliable, and far more bearish a proposition than
a simple cycle ending pattern that we have at present.
This is not to say that the pattern cannot hold, it is just that it is
notoriously unreliable as it is such an obvious pattern and thus can act
as a magnet to basic technical traders who simply see the pattern and
dive in. I leave it to the reader to look at history of various markets
and stocks to confirm for themselves that double tops at the end of a
run forward are not worth betting on and that caution is the best approach.
Having said all that, we cannot deny what we are seeing and thus we have
to look forwards should the pattern hold. If this is so, then we can apply
the 200% rule on Doubles, that being, the final decline should be
200% of the initial decline from a double. Looking at the current S&P,
the initial leg down was 53 points, so should the declines continue with
this second leg down then the expectation is 200% or 106 points from the
highs. This marks 909 as the projected termination point. Interestingly
this is also 61.8% retracement from the 31stMar - 17th June range as is
highlighted in this weeks S&P chart. You can also see how other prices
also gather around certain levels, so it is worth watching should the
markets turn south again this week.
Looking at the swing charts, the S&P has broken to new swing lows
breaking the low at 10th June. Looking at the DJIA, this too is also the
case, however the pattern is more bullish than bearish as the break of
the swing low was minimal and was recovered by Fridays rally, so the punters
are happy to be long over the weekend. The DJIA this week has a 2 bar
swing chart applied and shows how a lower top has now formed, but is precariously
placed as another up day on Monday will swing the pattern again and give
us a compressed pattern. This would be in keeping with what I have been
saying this past few weeks, in that we may be dealing with a complex wave
4 and as such we can expect this convoluted swinging up and down. This
method of filtering has a two fold result : 1) Unfortunately it keeps
you out of the initial movement out of compression unless you get a short
swing movement that lets you in (also known as a gift) but the real beauty
of this method of course is that it keeps you out of churning markets
when small losses can mount quickly.
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