The correction resumed in earnest today and even though volume was light there is little doubt that the market was under distribution whether IBD counts it as such or not. The Dow is only 22 points away from triggering an HS Top sell signal, and the SP500 is not far behind. However, as much stock as technicians put in this pattern, we may not be as far away from a bottom as many think.
First of all, just because a pattern triggers doesn't mean that the fully measured target will be realized. At thepatternsite.com Thomas Bulkowski has categorized 98 chart patterns and the statistical results relating to them. The % of trades meeting the HS Top target is only 55%. Bulkowski recommends using a target based on the % meeting the target times the pattern height, which means, in this case that many traders are over-estimating the downside target for this pattern. I come up with a target of 850. (I erroneously stated it as 840 earlier today.) The 38.2% RT is 845, so we are only about 50 points away in the SP500.
The above chart shows the equity only put/call ratio. We are now beginning to approach levels seen at market bottoms and we haven't even confirmed a top yet. However, I suspect that what we may see is a spike in the CPCE once (if) the HS Top pattern is triggered, followed by a rally to the underside of the 50dema, followed by another decline with a lower spike in the CPCE to form a positive divergence. Ideally we would like to see the 5,200,1 PPO go above and then back below 28% to confirm the bottom. We may only be 8 trading days away from a potential bottom.
Once the HS Top is triggered sentiment is likely to swing to the bearish side quite quickly. This will provide support for the next rally.
No comments:
Post a Comment