October 22, 2008 Recap: Down but Not Out

Silly me for thinking that the range contraction on Monday and Tuesday might now lead to range expansion. This market is in no rush to go back to normal levels of volatility. Still, the moves weren’t as extreme as we saw earlier in the month both based on volume and percentage change. The S&P and Nasdaq both made new multi-year closing lows but did not violate the pattern of higher intraday lows they’ve made this month. So far each of these pushes lower has been less extreme than the prior one. That should give the bulls some hope that the current October intraday lows will hold.

As you see in the charts, one can still make a case for (somewhat) symmetrical triangles continuing to be built. Here are some notes on symmetrical triangles:

While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout.

Edwards and Magee suggest that roughly 75% of symmetrical triangles are continuation patterns and the rest mark reversals. The reversal patterns can be especially difficult to analyze and often have false breakouts. Even so, we should not anticipate the direction of the breakout, but rather wait for it to happen. Further analysis should be applied to the breakout by looking for gaps, accelerated price movements, and volume for confirmation. Confirmation is especially important for upside breakouts.

Trend Table

Everything’s down again

Trend Nasdaq S&P 500 Russell 2000
Long-Term Down Down Down
Intermediate Down Down Down
Short-term Down Down Down

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I’m simply using the indices’ relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

Comments

  1. Posted by Greg Feirman on October 22, 2008 at 9:26 pm

    Do these higher intraday lows on lower volume mean anything to you? I’ve been watching that too and it means you can draw that upward sloping trendline.

    I’m pretty frazzled with my decision to put money to work at this point.

    Hanging in for now. But if that trend line is broken do you think all bets are off?

  2. Posted by Dr. Duru on October 22, 2008 at 10:04 pm

    My guess about the tendency to continue the on-going pattern (75% of the time) is that the triangle simply marks a period of indecision (and mounting tension) in the middle of a larger trend. In other words, the appearance of the triangle is most often a distraction from what is really going on. =gulp=

  3. Posted by Dr. Brandt on October 23, 2008 at 1:45 am

    I believe wall street is going to retest the lows of 7800 or so that was made during the intraday session a few weeks ago. Can you do a chart based on the market testing those levels again and where the support will be if it falls through those levels.

  4. Posted by Ramki on October 23, 2008 at 7:20 am

    I quite agree with Dr. Duru that these corrections are a distraction from the main trend, which, in the case of these indices, is still down (Mike’s table above also shows this clearly). As a further problem, what appears to be a symmetrical triangle could often turn out to be something else (which is my view in Nasdaq) and what I believed to be a prolonged correction in Gold actually turned out to be a symmetrical triangle (http://www.tradewithramki.com/2008/10/the-gold-rush-for-the-exits/). Hence,as traders we should keep our focus on the main trend, and enter trades at low-risk levels, ofcourse with suitable stops.