The Dreaded Broadening Top

Don Worden (of TC2000) mentioned a possible broadening top pattern in the market last week. It’s not a pattern that I look for, or even believe in, but I wanted to post about it anyway. He mentioned it again in yesterday’s report. So here it is, do with it what you will:

The Worden Report (Thursday, October 9, 2003)

Not Without Flaw

The major averages were up, volume was up and breadth was solid in all sectors across the board. Midcaps hit new highs.

But the market ran into selling pressure a bit more than half way through the session. Volume going down in the SP-500 and the Dow was heavier than it had been going up. More than half of the day’s maximum gains were given back. In the Dow, the intra-day turn came right at the trendline defining the upper limit of the possible “broadening top.” In the SP-500 and the Nasdaq, the trendline hasn’t been reached but the previous high has been taken out, meaning it’s now technically the pattern we call a “broadening top.”

As I told you before, I don’t have much confidence in the reliability of broadening tops, and I have always doubted that when Schabacher invented the pattern back in the thirties, he had enough data to base it on. However, there is little doubt that he was right in his basic assumption — that it is the sign of a confused market. And, of course, confused markets have a strong tendency to be resolved on the downside. But not always. I have seen a lot of such patterns fail to work

I think we are in a bull market, and, as is true of most bull markets, many of the surprises have been on the upside. This tendency will hopefully persist. But this is not a market without flaw, and it pays to be aware of what your behavior will be if it turns on you like a wild animal in a cage with its trainer. -DW