Friday, April 17, 2009

A Bearish Wedge?

It is now common knowledge that the markets are nearing the completion of a bearish wedge, or ending diagonal triangle in elliott wave terms. I don't recall ever seeing a more highly publicized pattern, as if it is obvious to everyone that the markets are ready to correct. Occasionally the masses do get it right, but I have my doubts. I recall more than a few occasions when I was certain that I had identified an ending diagonal in a stock or index only to see it continue sharply in the direction of the trend. And that is the danger here. We could see the indexes explode higher instead of correct.

So far there is no evidence of a change in trend. In my opinion the risk is still to the upside as I have been saying for weeks. If you have doubts, buy some insurance - index puts or short ETFs. According to Bulkowski's, downward breakouts of rising wedge patterns hit the target only 46% of the time, and downward breakouts are ranked 20 out of 21 in performance of bearish patterns (1 being the best). To me, this is a pattern to be aware of but not one to take a pre-emptive position on. We may very well see a sharp thrust down for a day or two to shake some people out, but until I see evidence of a trend change, I will just keep trailing stops and looking for new setups.

I can't tell you how many times Elliott Wave International called the end of the rally in 2003. At least a couple of those were ending diagonal patterns. Well, all that happened was the rally would correct 5% to 8% and then surge higher. That may not happen this time, however, too many people are predicting the end of this rally. One pit trader has been on CNBC every morning this week talking about how he keeps trying to sell this market with no success, but he is sure the top is near. When I see people like him saying they are buying this market because they were wrong and now they believe the rally is for real, I will start to look for the exits.

No comments: