Markets Becoming Ridiculous

Aug 15, 2007: 6:02 PM CST

Yesterday, I mentioned I would begin to define the market trend as “down” when it broke the 200 period moving average less than 180 points below price… and today price rests directly on that moving average, teetering between confirmed uptrend and confirmed downtrend. A swing of 50 points lower will be enough to confirm the Dow Jones Industrial Average as being in a freshly confirmed downtrend.

The market is testing the “Line in the Sand”, or the last stand for buyers/bulls.

Also, yesterday, I mentioned that the 200 period moving average stood at 12,832 and hinted that price may test this area soon… today’s price low was 12,834! Price indeed did bounce off this level, but over the last two weeks, price has broken the rising 20 period as well as the rising 50 period moving average. The current posture of the 20 period moving average is “clearly down” and the 50 period MA has just turned “down.” Also, as an added bearish sign, the 20 period has crossed under the 50 period.

Summary: The Dow will be in a confirmed downtrend should it fall 25 to 50 more points in the next few days. This is about as close as it gets, folks! From a market structure standpoint, we will begin to reclassify the current price action on the daily charts.

Let’s look at the Dow:

Again, if you like nail-biters, this is it. The market is now in a “prove it or lose it” zone. This is also “Skin of the Teeth” zone.

Traders and strategists – especially longer term position traders – observe the 200 period MA very closely and make major investment decisions based on the relation of price to the moving average. In fact, it has been declared “The Line in the Sand,” referring to the battle between bulls and bears. It has been noted that “Bulls rule above the 200 and bears rule below it” and, because many investors believe this, it rings true more times than not.

Those who love to live dangerously, or live on the edge, you will understand the position of the market. The market has decided it was bored with the uptrend and decided to “live on the edge” just a bit.

The test of the 200 is unsurprising, and in fact served most likely as an “air pocket” where technical daily traders had few reasons to buy until price tested this zone. Such temporary absence of buyers created a ‘pocket’ where the market fell naturally. One could even call it a “Magnet Zone” where the moving average served as a magnet pulling price towards it.

Those of you who like to put on countertrend or reversal trades, this might be the time for it. If the market was to reverse and go higher, odds favor that it will do so at this level.

Fibonacci

It is important to note that traders who love esoteric Fibonacci ratios and data will note the following:

The market has experienced FIVE down days in a row.

Prior to that, the market experienced THREE up-days in a row.

If the market observes a true Fibonacci pattern, we can expect price to reverse and rally from this point.

As always, price is the ultimate arbiter and we must see what happens at this level.

After all, it’s not every day that a major market index tests its “line in the sand” 200 period moving average…! Trade well.

4 Comments

4 Responses to “Markets Becoming Ridiculous”

  1. Joe Says:

    Corey,

    It’s always good to follow your blog (in my netvibes) and its insightful posts. After 5 years of an uptrend with any correction less than 10%, the current pullback just “has to be”. I doubt it will end here, yet, even though I don’t see a longer bear market on the horizon at all.

    A short term trend reversal seems overdue, though. The sentiment has become so bearish and markets so oversold that we may see an uptrend even tomorrow or Friday. After that the downtrend may continue for a bit, though. We’ll see. All in all too much volatility for me and I’ll be happy on the sidelines.

    Joe

  2. Corey Rosenbloom Says:

    Thank you, Joe, for your comment and for reading. I’m a big Netvibes fan myself! I use it as my reader as well.

    I’m with you there as well – ‘frightening’ corrections of 10% or more are actually quite healthy for bull markets as they shake out the ‘froth’ and excesses… and also provide key buying opportunities for those willing to step up to the plate and assume the risk. I’m not calling a top in this market either technically or fundamentally at all.

    It is a reality that the market seems destined to change its trend from up to down, given a few more down days, and that’s find. It will just shift the broader perspective and definitions, as well as strategies. If the trend becomes down, the bias will thus be to the short side and price swings will be expected to be longer and more profitable on the short side. Any rallies will thus be ‘counter-trend’ and ‘riskier’ plays.

    You’re right about the sentiment. Though I have said nothing about it, a trend will often change when an overwhelming majority of participants exhibit stark continuity of thought… in this case, that the market will continue going down for quite some time… then it will rise against their thoughts. It’s quite perverse.

    Be safe! All the best,

    Corey

  3. Active Trader Says:

    Corey,

    Well written. I hope you don’t mind but I borrowed your work to use in my blog. As always, I appreciate the insight you bring to the table. Best wishes…I hope the market treats you well.

    Rich Strehl

  4. Corey Rosenbloom Says:

    Thank you Rich. I’m honored to have you quote me on your site. I enjoy reading your perspective as well. Thank you for your kind words and support.

    This market has been rough, but ironically I think it’s been more difficult on the “Big Money” this time rather than the smaller retail traders. Interesting.

    I wish you the best as well!

    Corey