Rounded Reversal Up Underway?

Jul 8, 2008: 7:52 PM CST

Today, the US Stock Market may be in the process of completing a ’rounded reversal’ or ’rounded intraday bottom’ before heading higher in a couter-swing back up, which will work off the ‘oversold’ technical condition we’re in.  Let’s look at the charts to see what’s happening.

DIA (Dow Jones ETF) 30 minute chart:

I may have drawn the far right side of the reversal a little more pronounced to the upside than intended, but you can almost feel the shift in ‘power’ or dominance from the sellers to the buyers, as the buyers now have their chance to push the broader indexes higher.

Should this pattern complete, it will signal an orderly intraday transition from selling pressure over to buying pressure in the short term.  Any such rally will be deemed a ‘bear market’ or ‘oversold’ rally, and isn’t expected to have significant strength (meaning do not mistake this for the bottom just yet).

Price has tested and broken above its key 20 and 50 period (30 minute) moving averages and could be working on a temporary bottom or reversal back to the upside.

The 60-minute (hourly) chart shows this a little clearer.

After price plunged through the latter half of July (notice the overnight gap and subsequent “trend day”), price began to form sort of a broadening consolidation pattern, during which time momentum began to diverge to the upside – this was a clue of weakening momentum on the part of the sellers.

Price has now broken above the hourly 50 period EMA and, although we could get a retest back into the ‘value area’ of the consolidation, odds seem solidly in the bullish camp for short-term higher prices.  As such, the short-term outlook on the major indexes has shifted to the bullish side.

This view will be invalidated with a close beneath the $111.50 (Dow 11,500) level, which would be an excellent zone to place a stop if you wanted to play this counter-trend move.

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