February 2nd, 2009

The Great Walls of Reversal or Consolidation

Phew! Today’s market action was a close one. I feel like I’m standing on the Great Wall fending off the invading hordes of bears from below trying to crash through a defensive wall known as a “supporting trendline”. And above, another wall that the market has to climb over called a “resistance trendline”. Help, we’re stuck in the middle.

But if today turns out not to be a fluke then a true reversal can be closer to becoming a reality. Many of the so-called market experts you hear and read today say things are going to get much worse before they can get better. But I believe they’re expressing only their own fears and beliefs; they’re not speaking on behalf of the market. No one speaks on the market’s behalf, only it speaks for itself.

All market indexes are converging into symmetrical triangle formations. Unfortunately, this chart pattern happens to be one that could break either up or down with few indicators to reliably tip the market’s hand as to which it will ultimately be. According to The Pattern Site, a site presenting statistical research by Tom Bulkowski, “recognized by many as one of the world’s leading authorities on chart patterns” and the author of a number of books, symmetrical triangles are:

What makes the pattern so interesting this time – not interesting but important – is that it’s at the same level as the 2003-04 bottom of the Tech Bubble Crash. Draw a horizontal trendline from that historic low and you’ll see this emerging symmetrical triangle forming smack dab on that line (remember the earlier conversation of a neckline of a humongous double-top last November?). It’s to be expected for the market to take a breather and collect itself here. What’s uncertain is whether the pause will turn out to be a consolidation leading to further declines beyond the trendline or a reversal leading to a recovery and the beginning of a new bull market.

Here are current charts of the market indexes:

  • S&P 500
  • Dow 30
  • NASDAQ
  • Russell 3000

We can all hope that a fully-formed symmetrical triangle leads to a resolution (whether it was a consolidation or reversal pattern) but the odds are fairly high that the market action will merely morph into a more elongated, more complex pattern (like a double-bottom) of which the symmetrical triangle turns into merely the left-hand portion.

We can all wish we knew which way it will break, but no one on Wall Street knows for sure. The only people who can actually impact the outcome are sitting in Washington but it even looks like they don’t know precisely what to say or do. A Great Wall would be much welcomed now.

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