Monday, October 26, 2009

Double Top With Bear Flag

The Qs completed a 3 wave rally from the 10/22 low just after 10am this morning. A sharp selloff began just before noon today that bounced off support at the 10/22 low and then formed a bear flag. Coming under 42.79 will confirm the double top which projects to 41.76, however, in reality the likely target is the 50dema which is currently at 41.50 followed by the August high at 41.08. The trendline from the March low is currently at 42.40, so if the above targets are hit the trendline will be broken, adding to the growing list of sell signals. We now have renewed MACD sell signals on all of the major stock indexes as well.

While some sentiment measures are increasingly bearish, such a change in sentiment from bullish to bearish is not in and of itself a reason to believe the correction cannot be a deep one. This change in sentiment is normal as the trend changes. Most intermediate term indicators such as the weekly MACD and Stochastics are far from oversold and the 10 month cycle is now in its down phase into the first of December. We should expect that the correction will intensify over the coming weeks with sharp intervening rallies. A break of the rally trendline followed by a retest of the trendline and a move below the swing low of the break will confirm that a move to the July lows is underway.

At the same time, most stocks will not have had time to set up for short trades, rather they will be pulling back for a chance to enter the established uptrends at better prices. AAPL and AMZN come to mind.

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