The Final Line in the Sand Overhead for the NASDAQ

Oct 27, 2009: 2:18 PM CST

The NASDAQ Index has approached a defining line, which is likely to form the boundary between calling this market a “Bear Market Rally” and a “New Bull Market.”  What is that level, and how close are we now to it?  Let’s take a quick look at the NASDAQ Weekly Structure.

There are a few key points to watch, as noted above.

61.8% Fibonacci (of Whole Bear Market):  2,251

The ‘maximum expected’ retracement for a Bear Market rally often is accepted to be the 61.8% retracement – anything that retraces beyond that is often considered to be stronger than a normal or standard retracement, and many technicians use the 61.8% retracement as the “line in the sand” between a “retracement” and “impulse.”

Prior Price Support from 2008:  2,160

According to the “Price Polarity Principle,” it is accepted that “Old Support Becomes New Resistance,” which is why this is an important level to watch as a potential stopping point for the current rally.

This is more than just a major prior support zone.  A meaningful move above 2,160 or 2,200 would invalidate a leading Bearish Elliott Wave count.  Though not labeled, envision the March 2008 lows as the end of Wave 1 and the May 2008 highs near 2,500 as Wave 2.

Count the March 2009 lows as Wave 3 and then that places us squarely at the end of a powerful Wave 4 Rally with the expectation that a final Wave 5 Impulse Down is yet to come.

Let’s look back to one of the Basic Rules of Elliott Wave Theory:  “Wave 4 Cannot Enter the Price Territory of Wave 1.”  Some analysts allow a slight overlap, but if we go much beyond 2,200, it will be the turning point to reject officially this bearish count in favor of the more bullish count which would place the final (terminal) 5th wave at the March 2009 lows instead of the 3rd wave.

This ‘bullish’ count places the 4th wave at the January 2009 highs and the final 5th wave at the March 2009 lows.

See my May update on the S&P 500 Competing Wave Counts for how the structure plays out on the S&P 500 (neither interpretation has changed since then).

This count has been updated – but not changed – in the “August Elliott Wave Count” update.

200 Week SMA: 2,214

The 200 week simple moving average currently rests at 2,214.  While not as significant as the Fibonacci or “Polarity” resistance levels, it adds to the case that resistance is to be expected at 2,200… or if broken, then bears will have lost perhaps their final argument that this is a “retracement” in a bear market as opposed to a “new bull market.”  As long as price remains above the 200 week SMA, it becomes increasingly difficult to argue a bearish case.

Look back to the three “spikes” beneath the 200 week moving average and note that, while bears broke through this level three times, a simple close outside of this boundary did not mark a “new bear market.”  These were “Bear Traps” and we could arguably have a “Bull Trap” in that price could close above the area and then fall beneath it… but that’s a lot to ask.

Taken together, we have the following argument for expected resistance:  2,251, 2,160, and 2,214.

A break and close above 2,251 would violate all these levels and would put the argument squarely and objectively within the bullish camp.  Until then, it is generally expected that these levels will hold, thus forming a deeper retracement down from these overhead targets.

Let’s keep watching these targets as final lines in the sand between objective market classifications between bull and bear markets.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Weekly View and Elliott Count of BIDU Oct 27

Oct 27, 2009: 11:29 AM CST

With Baidu.com’s (BIDU) stellar $55 (12%) loss overnight (which is partially being recouped in today’s trading), let’s take a quick look at the weekly chart to find that the ‘damage’ so far was contained to the rising 20 week EMA, and then take a look at a detailed recent Elliott Wave count on the recent move off the late 2008 lows.

Baidu.com (BIDU) Weekly Chart:

We see that the 2008 lows near $100 per share were part of a three-phase “ABC” Corrective move – with the final move down being a horrendous drop from near $400 to $100 per share during the later half of 2008.

Price found a bottom and then has rallied all the way back to new all time highs on Monday… which were quickly erased (as if grasping at straws) overnight and into this morning’s trading day thanks to BIDU’s forward-looking earnings guidance.

What’s fascinating to me is that price opened AT the rising 20 week Exponential Moving Average, which is expected to be support in a rising trend… and so far price has bounced upwards off that level just as expected.

To be fair, a lengthy negative momentum (and – to an extent – volume divergence) has formed under price since the June indicator highs.  In powerful uptrends, price can overcome negative divergences, but eventually, these divergences are expected to ‘catch up’ with price in the long-run.

As long as price remains above the $350 level – the 20 week EMA – we can classify the intermediate term trend as up… but for a look at the daily chart along with a detailed Elliott Wave count (showing a grossly extended third wave which happens from time to time), let’s look at a chart from the new website Fibozachi.

(Click on Chart for Full-Size Image – courtesy Fibozaci.com)

Courtesy Fibozaci.com’s Technician’s Corner, I would suggest reading the entire post entitled “Baidu – Possible Top:  Long-Term Elliott Wave Count.

What interests me most – beyond the extended third wave – is the final “Bearish Rising Wedge” or – in Elliott Terms, the “Ending Diagonal” which is a known pattern that is correlated (but never guarantees) market (or stock) tops, as indicated in the article.

Fibozachi notes that price can often be expected to ‘eject’ out of the rising wedge (or ending diagonal) 75% of the way to the apex, which is the point in which the converging trendlines meet – BIDU appears to be at that 75% line prior to today’s morning decline.

This is just another interesting, deeper level technical take on the current structure of BIDU.

Let’s keep watching to see how far this support bounce of the 20 week EMA will last and see if this indeed is the peak for prices for this powerhouse of a stock.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Rounded Arc a Bad Omen for SP 500

Oct 26, 2009: 5:05 PM CST

As I’ve been mentioning, the S&P 500 continues for form a “Rounded Arc” formation which appears to be the dominant technical structure on the S&P 500. Let’s take a quick look at this development.

What literally leaps off the chart is the multi-swing negative momentum divergence that has set-in prior to the 1,100 highs (so far) in the S&P 500.  Negative divergences often precede (or forecast) price reversals – moreso multi-swing divergences.

A simple divergence is one thing – multiple divergences are another.

In addition to the divergences, we see price itself structured in a “Rounded Reversal” or “Rounded Arc” pattern beginning with the October lows near 1,020.

Except for one minor blip, the price has remained completely contained within the upper and lower arc as shown above – that takes precision and balance… and also forecasts the road ahead for prices provided we stay within these arc trendlines.

It would seem as if an up-move was the next likely short-term move ahead in the market (bouncing off support of the lower arc trendline and the 200 period SMA on the 60min chart) – perhaps to the 1,080 range, however should sellers step up and force price outside the lower trendline (where we are now), then we would see an acceleration to the downside and a potential collapse back to 1,020… but we’re not there just yet.

Continue following this structure as well as the upper and lower ‘arc’ trendlines as shown above.

This chart – along with more analysis as to the current structure and opportunities – is included in today’s 9-page PDF “Idealized Trades” report for subscribers.

Daily Idealized Trades reports serve two functions – first to teach intraday trading through explanations of numerous examples of intraday trade set-ups, structure, and opportunities; second, to include ‘forecasting moments’ such as the chart above where we look at current structure and assess possible opportunities into the next trading day.

Visit the “Idealized Trades” information page for sample reports and subscription information.

Corey Rosenbloom, CMT

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A Weekly and Daily Chart View of UNG Natural Gas Oct 26

Oct 26, 2009: 11:51 AM CST

With the Natural Gas ETF UNG falling almost 5% before mid-day on Monday, October 26th, let’s take a quick look at the broader picture by seeing the structure and opportunities on the weekly and daily charts.

UNG Weekly:

The weekly chart is showing a lengthy Arc or  “rounded reversal” pattern that continues to drag out into the $10 per share level.

Volume has trailed off as price has found a consolidation range between $10 and $15 per share in addition to the positive momentum divergence we see underlying price.

The trend structure clearly is down, and price is underneath all key weekly moving averages, and I would suggest taking a special look at the 20 week EMA, which currently resides at $12.38 per share.  The 20 EMA has contained all price rallies so far like a brick wall.

Unless you’re an aggressive trader playing for a trend reversal, I wouldn’t touch UNG long for anything other than a day-trade until price can prove that it can sustain itself above the 20 week EMA for at least a few weeks.

UNG Daily:

On the daily chart, we see that price was recently unable to sustain a move above the daily 20 and 50 EMAs – which has been the pattern as seen on this chart.  We look at current characteristics of successful and failed patterns to understand the “Character” or “Behavior” of a stock or market.

In this case, buyers can push price slightly above these moving averages, but have never been able to sustain price above them for more than a few days.  As such, any move above the EMAs – particularly when dojis have formed – has been a sell-signal (almost mocking bulls and creating ‘Bull Traps”).

The black lines reflect adaptive trendlines from earlier in 2009.

If the prior trend continues, then we will be looking for a price move down to test $9.50 or $9.00 in the next few weeks – provided that the $12.00 level holds as it seems to be doing as resistance.

Thus, $12.00 is the line in the sand, and as long as price remains underneath this level, then odds seem to favor lower prices as a factor of the crushing downtrend in place.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Did You Hear the One About Amazon? Two Lessons from AMZN

Oct 24, 2009: 3:29 PM CST

With Amazon leaping 27% Friday to an all-time high, it’s certainly a good idea to take a look at its current chart to see the progression that led to this move.  Let’s take a quick look at Amazon’s (AMZN) weekly and daily chart.

On better than expected earnings, Amazon gapped Friday as seen in the daily chart below.  This is how the earnings ‘pop’ affected the weekly chart.

Price was challenging resistance overhead at the $95/$100 per share level which was both “round number” resistance and prior resistance from the 2007 price highs.

Underneath this resistance, price had formed a negative momentum divergence similar to that which formed in 2007.

The spike to new highs above $100 (price opened Friday just above $110 and ran higher the whole day) triggered virtually all stop-losses from the short sellers who had positioned themselves short due to any bearishness they found in the stock, as mentioned above.

This is the “stop pop” logic played out on a larger scale, which works similarly to an avalanche beginning small then careening out of control – or in the market, we call it a “Positive Feedback Loop.”

While the weekly chart was showing a bearish posture as long as price was under $100 (resistance and negative divergences), the daily chart was not that negative.  In fact, one could have gleaned a bullish structure from the daily chart.

Going back to simple TA, the trend was up and price was above all key daily moving averages, and they were in the most bullish orientation possible.  In fact, prior to Friday’s ‘boost,’ a bullish doji/hammer candle formed just above support at the 20 period EMA.

To be clear there was nothing to tell you price would surge like this in the morning – that’s the risk traders take when the trade in front of an earnings report – sometimes you get stellar moves like this… other times you get shocking moves down against you and it turns into a risky gamble for most traders.

As many chart watchers and traders will tell you, however, the large positive surprises tend to occur in stocks that have been moving up for some time.  In other words, surprises have a tendency – but not ‘hard and fast’ rule – to come IN the direction of the prevailing trend.

Thus, there’s (at least) two lessons chartists can pick up from Amazon’s ‘surprise’ huge move up on earnings.

1.  “Surprises” often happen IN the direction of the prevailing trend

2.  “Surprises” which ‘bust’ sell signals (taking out stop-losses) often create larger moves than expected (in the opposite direction)

Amazon’s surge is huge news, particularly if it can be sustained at these higher levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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