07/30/2010
Another Fakeout Coming?
It has occurred to me that there have been two fakeout trend changes since the April top, and I am wondering if a third fakeout is in progress. The first fakeout was the rally from a double bottom and a breakout above a declining tops line, which was accompanied by a PMO crossover buy signal. This proved to be a bull trap as the rally failed.
The second was the drop down through the neckline of a head and shoulders pattern, which was accompanied by a PMO crossover sell signal. This quickly turned into a bear trap when prices rallied back above the the support line.
Finally, we have another break above a declining tops line, a PMO crossover buy signal, and a PMO positive divergence. Also, price is above all three moving averages. However, on the negative side, a rising wedge has formed, which typically resolves downward. If that happens it would violate the rising trend line and inject some serious doubt into the picture.
The market action during the correction from the April top has been more than a little confusing. Prices passed up a great opportunity to go down, yet they are not showing inspiring upside action either. The wedge pattern resolving downward would not be the end of the world -- it would be an event with short-term implications -- however, taken in the context and proximity of the declining tops line support, it would not be a pleasant experience for bulls.
Bottom Line: Our timing model is bullish, and there are quite a few positive divergences on our medium-term indicators, so we think the rally will ultimately succeed, although perhaps not necessarily in the most elegant fashion. Final thought: Rising wedges can sometimes resolve upward.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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