Summary for Week Ending 13th August 2005
This past week we again saw Oil start to play a role in the market. Although there was a slight rate increase by the Fed, it was oil that played the major role in putting a damper on proceedings. Following on from last week, I mentioned that we were looking at a rising wedge formation, which is in itself a bearish pattern as we have the market rising but failing to break out clearly into new territory and compressing back into the trading range. I also mentioned that this can also be a bullish pattern !?!? How can this be, some have asked. To answer this we have to look at the pattern from both perspectives.
Firstly let look at the bearish point of view. If we look at the weekly chart for the S&P we can clearly see the rising wedge pattern. I have also marked on the weekly chart the proximity to the 61.8% retracement of the major range. We can see that every bullish rally is decreasing in range to the previous one, and every retracement is cutting back into the the primary trading range contained within the wedge. This would show that whilst there is energy or an impetus to go forwards, it is dissipating every time it gets to a new level hence we have a system that is weakening.
Secondly, as explained above, the system is contracting. This however can also be considered as a continuation pattern as the market is 'holding its breathe' . Although the market is compressing, its also making higher highs and higher lows and so can be considered as setting itself up for an explosive break to the upside. As more time is absorbed going essentially sideways, the greater the force should be when it finally breaks from its apparent slumber. So what could trigger a fast upside movement. More than likely would be a false break to the downside as this would get all the false shorts set only to see big short covering as the market rallies.
So which is right ? In fact both scenarios are correct. If we get a break to the upside then the 1360 area is a good target price range which is about the 75% retracement level. If it breaks down, then it should start fairly quickly, but we don't appear to have any reason for seeing an extended bearish move. Hence my scenario is to the upside until I see strong evidence to the contrary.
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