The Tycoon Report

Here's What The Market Will Do Next

Tuesday, April 7, 2009 | Chris Rowe

Two weeks ago, I wrote an article title "The New Market, New Support Levels, New Resistance Levels", and in the last couple of paragraphs, I talked about the "next potential resistance levels."  I figured I would give you a small continuation of that article. 

Let's just jump right into it ...

In the chart below, you can see two red down-trend lines.  The shorter, thinner line is the one I left you off with in the article I just referred to.  You can see that we seem to be right at the "moment of truth" here.  When staring down a down trend line, we look for the market to pause and decide whether it will continue its down trend or penetrate the trend line in a meaningful way, proving its strength and ability to "buck the trend."


A trend line may or may not be a big deal, depending on how long and how many times the trend line has proven to be viable in the past, but it should ALWAYS be respected.  (This one is only 5 months long and only recently became an official trend line, so while whatever the market decides to do with it is noteworthy, it won't be some huge game changer.)

It's always more likely that a trend will continue (statistically).  And this is a trend line that traders are focused on right now as a possible point of resistance.  But there are a few things that alter the likelihood of this particular down trend continuing (for the time being).  Let's take a look at the MACD (moving average convergence divergence) indicator.

One sign that a down trend wants to (or is more likely to) reverse back up is when we see positive divergences (the market makes lower lows while the MACD makes higher lows).  We see this in just about every way possible today.  I used three separate colors to point them out.  In October the market made even lows while the MACD made a higher low (blue).  From October to November the same thing happened (purple) and it happened in a major way from November to March (green).

The fact that the MACD has done this adds tremendous weight to the intermediate bullish argument. 

Something else that is very noteworthy and adds more weight to the bullish argument is the fact that the WEEKLY MACD (found on a weekly chart, as opposed to the daily chart above) also shows a positive divergence.  The weekly chart gives us long-term signals, so this is something that even adds credibility to the bullish argument that we might have seen "the" bottom.  And I'm not here to call the bottom, just to tell you what odds favor at any given time.  (Funny how so many analysts call bottoms or argue against them but can't clearly explain what the stock market odds favor at the time.)


So back to what I was saying earlier: It's always smart to bet in the direction of the trend that has already been established, but instead of making our decision in a vacuum (just based on that single factor), we have other important indicators that contribute to our stock market posture.  So the positive divergences make me respect the down trend line from November to today a bit less.  I'd be less shocked to see that down trend line penetrated. 

What else makes me give less respect to the trend line?

You might remember my article from mid-March titled "A Non-Comedian Calling the Market's Next Move" where I shared with you the fact that a very important stock market indicator, called the NYSE Bullish Percent Index, implied demand was in control of the market, and therefore, we had to be intermediate bullish (a bullish trend found within the long-term down trend, aka. "bear market rally").  These kinds of stock market rallies are typically doubted by market commentators, but they can be fierce, and you want to be on the right side of that trade when it happens.  We obviously have.  But my point is that one major factor that makes me doubt this relatively minor down-trend line is the fact that the NYSE BPI is right now showing that demand is still in control.  That means more and more stocks have been moving to buy signals (penetrating their own resistance levels).

(For more on the NYSE Bullish Percent Index, check out Bob De Dea's article "The Best Internal Market Indicator EVER!" which basically gives a great lesson on the indicator.)

So the major takeaway here is to start with the established trend lines, and watch them closely when they are reached.  In this case, you should be on alert right now because the down trend line (resistance) does exist.  But once you have that info, it's important to take a synergistic approach to technical analysis, and consider the other facts.  That will tell you how much respect to give a trend line (and be sure to never completely lose respect for one just because that would suit your account!).

(Below is the first chart from above)


If the market does penetrate the smaller down trend line on the chart, the next place to look for resistance would be the bigger trend line I drew from the May high to the December high, extending it out through today.  If the market can make it that high, that would be a 40% - 50% rally off of the recent low in March.  Investors should feel lucky, and like they are skating on thin ice if that down trend line is touched too soon (like within a month from now).  But we all know that wouldn't stop investors from continuously buying into the rally. 

If the smaller trend line is penetrated, it will be a big vote of confidence for the bulls.  That will probably give them enough confidence to bring the market up to the big, year old, trend line.  And that's why you have got to respect the bear market rallies, and change your stock market stance as soon as you see major changes like a column change in the NYSE BPI.  Those who stayed net short (or bearish) are grinding their teeth and considering closing out bearish positions with major losses right now. 

I will update you when the internal market picture, specifically, the NYSE BPI, changes, showing us that supply is once again taking control.  So stay tuned. 



“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider