The following technical price pattern is extremely rare, but is worth ‘filing away for further research’ when it appears.

It has a variety of names, including ’saucer bottom,’ “U-Turn,” etc but the pattern is defined by a slow and steady decline in price until an equilibrium (base) level is reached, and then demand picks up and price swings with a mirror-image of the prior slow downswing, forming a clear “U” type pattern.

In this particular instance, Dry Ships (DRYS), a stock that was doing extremely well this year and then all the sudden tanked exhibited this pattern intraday on the 5-minute charts:

Again, no pattern is ideal or perfect, and every day is unique, but you could almost draw two arcs that would form a “U” pattern.

Of particular interest is the increasing momentum divergence that developed from 11:00am until 1:00pm.

Notice how price continues to make new lows on the day and then we have an area of consolidation and then price begins its slow but stead ascent as a result of the sellers losing ‘momentum’ (or imbalance) and buyers gaining momentum (or imbalance).

Notice also how the 20 period EMA contains price both on the downside (until the 1:00pm break) and the upside (after 2:00). It’s an interesting yet well-watched moving average.

As always, when you see a pattern you like, catalog it and study it for future reference.

I was a bit surprised that there wasn’t a more negative reaction in the US Dollar Index as a result of the Federal Reserve’s decision to cut interest rates by .25 bps.

Typically, with lower interest rates, countries can expect their monetary indexes to be lower as a result of lower demand from foreign nations to own denominated assets in the country, especially when other currencies are yielding higher rates.

Nevertheless, the Dollar Index simply shrugged off the most recent fundamental development from the Fed and barely batted an eye.

In fact, the Index is in the middle of an upswing on both the daily and weekly charts.

Weekly:

The index is in the middle of a normal bear market correction, which is projected to take price to the $78 range, or a few percent higher before we can expect resistance to overtake supply.

Nothing can go down forever.

In the daily chart, the Dollar Index is trapped:

A positive momentum divergence has been resolved peacefully to the upside, and price is above the 20 period moving average for the first time since a brief head-fake above it in August.

Price is finding support at the 20 and resistance at the 50 (blue line). We are seeing consolidation at the moment, which is logical given the large volatility down-swing in price.

The orange square corresponds with the falling 20 period moving average on the Weekly Chart, and if the higher forces that are trading off the weekly chart deem it appropriate, then we should see at least a retest of that area.

There may be genuine supply at that level to drive price lower, but conditions are not yet safe to ’short’ the Dollar Futures or other FOREX related vehicle.

Either way, the trend is still down and so any surprises can still be expected to occur to the downside.

I’d like to see a few closes above the daily 50 period moving average to get very bullish on the Dollar.

 

Being as that it’s Wednesday, let’s take a mid-week look at the current (fractured) state of the US Equity Market:

Dow Jones Daily:

Price did indeed find support at the confluence of the key moving averages, as I indicated earlier that it might. The move by the Fed apparently was not enough for the ‘cutters’ on Wall Street, but a positive swing may be in the works.

• Price supported at the key moving averages
• The “path of least resistance” is to the upside
• Price carved out a new momentum high but is far from a new price high. This is a type of ‘non-confirmation’.
• We must now declare the daily chart to be in a confirmed (new) daily uptrend (higher highs and higher lows with price above key averages)
• Volume has ‘picked up’ to the upside swings

The NASDAQ:

Allow me to interpret all the lines I’ve drawn:

• There seems to be a major horizontal line which has served both as support and resistance.
• We are testing that zone now
• Price has broken beneath a very short-term upwards sloping trendline (bearish)
• Volume is NOT confirming recent upwards price action (bearish)
• Momentum (oscillator) is sloping upwards but has failed to make a new momentum high (nor has price made a new high)
• Price is trapped around key flat-sloped moving averages (neutral) but is currently beneath the 20 and 50 (bearish short-term)

Usually, for a healthier market condition, we would expect the NASDAQ to look ‘better’ from a technical standpoint than the Dow or S&P 500. It does not. This fact has bearish implications.

The S&P 500 chart is nearly identical to the structure of the Dow Jones. I will not belabor the point.

The Russell 2000:

Allow me to explain this interesting chart:

• Price is in a confirmed downtrend on the daily chart (lower highs and lower lows)
• Price recently inflected downwards of a declining trendline from October
• A head and Shoulders formation has formed and the target objective has been achieved
• Price recently violated a very short-term trendline to the downside (not extremely significant)
• Momentum and price are not making new highs (bearish)
• The moving averages are in the most bearish orientation possible (20 beneath the 50 which is beneath the 200)
• Price is beneath all key moving averages (bearish)
• The path of least resistance (best motion) is actually to the downside

Summary:

What we are seeing is “Non-Confirmation” in the US Indexes.

The Dow Jones and S&P are pointing “higher” while both the NASDAQ and Russell 2000 (which tend to lead the market at times) are both pointing lower.

It could be indicative that investors are fleeing out of riskier, more volatile stocks in favor of the more steady “Blue Chips” or established (defensive) companies of the Dow Jones.

If so, this could mean that larger investors see rockier times ahead and are positioning themselves accordingly.

Perhaps we should heed their movement if indeed this is the case.

 

Goldman Sachs today breached a triangle consolidation pattern to the downside, which has potential ominous implications for the broader market.

Not only did price break beneath a triangle or coil formation, but price violated the significant “200 day moving average” which often is viewed by those with little technical analysis knowledge as the “line in the sand.”

The momentum oscillator also formed a coil or triangle and momentum (black line) also has breached to the downside.

It must be noted that the $205 price level has held as support, and I may need to redraw the triangle to a more ‘right angle’ triangle should this level hold as support, and as always price could breach beneath temporarily, drag in short-sellers (and trigger stops) and then eject back to the upside.

There’s no way to know for sure which direction price will eject from a consolidation point, but often price moves can lead to strong temporary momentum (directional) moves.

In this case, it appears the move could be to the downside, which would have negative implications for the broader market, especially if financial stocks tend to lead the market.

Keep your eye on this and other charts from major financial companies.

I must say I was quite surprised by the ferociousness of the sell-off following the announcement from the Federal Reserve to cut rates .25 basis points. Typically, the market rallies in three pulses on those days but it appears the market discounted the expectation for a .50 point cut and was slammed instantly when expectations failed.

However, this morning, it seems that traders reassessed their initial thoughts and decided the rate cut wasn’t so bad, or that there could be future cuts in the works, that the Fed will support global central banks to avoid a global credit crisis, or whatever news-related data they wanted.

Nevertheless, the screaming price action of the last two hours of yesterday and the first two hours of today make for some interesting ’spinning heads’ (instead of talking heads) on TV and in the trading world:

“Oops! Price fell off a cliff!”

This was the view from the 5-minute chart on yesterday’s cut. There wasn’t even a counter-reaction like there usually is.

And today’s action so far:

There was almost a 300 point overnight gap in the Dow (something extremely rare, it would seem) which is now being faded, and has now reached the 50% level (half-way point).

This is a “gift from the gods” for the gap faders, as many stocks gapped higher and are coming off those highs, some forming picture-perfect “gap fade” candidates, while others exceed the percentage filter I like to use when fading gaps.

Nevertheless, these are absolutely interesting times we live in for those who live on the ‘thrill of the hunt’ or the ‘journey for instant profits.’

For me, I prefer more stable, ’swinging’ markets with clear targets and stop levels (aka support/resistance, prior highs, swing levels, etc).

“Make hay while the sun still shines” if you love these high volatility, mega-momentum environments.

If not, don’t try to force it. Step back and wait until your patterns appear and your strategy is ‘in favor’ for the day (or week).