Monday, August 16, 2010

No Change

The 1070 support was challenged today but bulls resisted the pressure. DMI is deeply in the red zone and EMAs still show a bearish crossing. Volume didn't pick up that gives bulls some hope. 

I think the major trigger for the sell off was the revised GDP, from 2.5% to 1.3%. How can these economists be 50% wrong in their estimate? I do understand 3-5%, within the standard deviation but 50%? Talking about incompetence. Japan's GDP didn't look too good either but market didn't react to this news today. 

 1070 remains the main support area in my opinion. Is it probably going to be tested again at least intra-day and is very important for bulls for this level to resist. Another support level is around 1065, the "neckline" of a potential head and shoulder on weekly charts. We also have a some support on 1040-1050 region so pretty much we can talk about a pretty difuse support between 1040 and 1070.

 Talking about "head and shoulder" I am going to tell you why I don't ignore it but I don't trust this pattern too much. The reason people like this pattern is because its predictive power. If you measure the distance between the high of the middle peak and the neckline you are getting the value by which the market is going to plunge (or rally if is an inverted head and shoulder). The trouble is most of the "head and shoulder" patterns fail and you can never be sure if this time is going to be for real or not. Right now, measuring the distance between the high (1220) and the neckline, 1065 we are getting 155. If we subtract this from 1065 we are getting 910. We may go to 910, who knows but I won't bet my money on this. What it's important for me is if the neckline is going to resist to the bears pressure or not. I treat the neckline as any other support line.

I am going to give you another reason to doubt this head and shoulder or any other one. Look at the chart bellow. Is the same like the one above but this time I am pointing to a potential inverted head and shoulder that by definition is bullish and predicts another 100 points from the neckline pushing SPX back to 1220. So which way are we going? 170 points down or 140 points up from here?

I wish you a good trading week!


P.S. Tiger, if you read this article, please leave me a message here or send me an e-mail. I tried to send you an e-mail today but it came back saying your e-mail address is unknown.

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