7/15/2009

Taking the contrarian approach (Part 2)

I last posted here that I thought we could see some upside because everyone was so bearish. Well, 3 days later, we are some 65 SPX points higher, and it seems the bearish crowd has been slaughtered. Well, because of this, I now think we'll see a reversal that could bring the S&P to new trend lows (i.e. 800-850 or so).

Notice the rare expanding triangle pattern that has unfolded. This is a consolidation, and should resolve to the downside to complete at least an ABC from 956. This pattern is awesome because it tricks both the bulls and the bears two times, leading to total capitulation by both groups before continuing the trend. Check out this post on Slope of Hope, those are pretty low spirits coming from a bear on the most bearish of blogs.

Also notice that price is testing, for the first time, the trendline which connects the May '08 and Sep '08 highs. Trendlines are rarely broken on the first pass. You normally get some kind of reversal before breaking through (if it does break through at all).

Finally, I was very pleased to see the market march right through previous resistance at 928 without a single correction. This is not bullish, because it indicates that everyone is on bullish. Think about it: if there were any bears, we would have had a pause near 928 as people would unload a bit. This one sided behavior tells me that the investment crowd has shifted to bullish on the short term.

In conclusion, don't be surprised if the recent rip turns out to be a false alarm. However, if prices do not reverse quickly and stay below 935, I will have to adjust my analysis.

8 comments:

Dave Narby said...

Nicely done.

Interestingly, the 'rare' (I guess it is) expanding triangle pattern you point out happened *twice*... The one time you point out, and also *immediately before*!

This ain't gonna be pretty...

Narayana said...

I don't see the one immediately before. Can you upload a screenshot and post the link? I'd be interested to see. Thanks.

edgar said...

Typical opex, you're probably right.

Cacabingbing said...

what is Opex?

Narayana said...

Options expiration week.

Cacabingbing said...

I picked on the expanding triangle pattern today. If you look at a weekly chart of SPX you don't see a C wave for this correction. Just A-B so far. The impulsive wave from 07 looks beautiful. I think this is going to be a fake head and shoulders fake out and we go down.

edgar said...

[link]

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