Tuesday, October 21, 2008

The Stock Market's Flat-Sided Triangle

As a person who follows technical trends in the stock market, my eyes light up when I see patterns develop that might give an inclination as to the next direction of the stock market. Over the last 9 trading days, a pattern called an "ascending triangle" has formed in association with the trading of the 30 stocks that make up the Dow Jones Industrial Average. The ascending triangle is a triangle that has its flat-side on top of the triangle. Normally, it is associated with a pause in an up market. Occasionally, however, it can signal the end of a down market.

Typically, the flat-side of an ascending triangle represents a point of resistance where traders come in to sell and try to escape from a falling market. As the number of "escapees" declines, each move to the downside is less than the previous day's or week's activity. Thus, an ascending triangle is formed. Usually, and not always, that flat line of resistance is broken as the last remaining "escapees" are eliminated; and, the result is that the trading in that stock or, as in this case, the "Dow" breaks to the upside and it can signal the end of selling in a bull market or, in this case, the possible bottom of a current selling trend.

It is quite "possible" (not ever for sure) that the free fall of the stock market is over. That doesn't mean that it is straight up from here. But, it might mean that we are seeing an abatement of all those almost viral losses that have hit the market over the last year. From here, the stock market may climb upwards and, then, somewhat fall. As a result, we could be in a lateral move for months as investors try and figure out whether or not this economy is really out of the woods. I personally have been out of the market for about a year. It now looks like it might be time to buy on a limited basis. I think that utility stocks or utility stock mutual funds or utility oriented ETF's (Exchange Trade Funds) with good dividend returns and good or excellent ratings would be a safer (never safe) place to get your toes wet because, irrationally, they have been hit extremely hard in this free fall. But, as always, this is just my opinion. No one should ever take financial advice from a stranger. You should always seek professional insights from your brokerage firm, investment adviser, or a ratings service like Standards and Poors, Value Line, or Morningstar.

One last comment for other market technicians. Another technical indicator, the Moving Average Convergence and Divergence or MACD has also showed a bottom as of 9 trading days ago. Further, the weekly bar chart of the MACD may be similarly hinting at such a bottom with volume confirmation. Additionally, on the weekly charts, there is a an extreme "tweezers bottom" (two hammers together) showing for those of you who might follow Japanese Candlestick Analysis. Lastly, the divergence pattern of the ADX line appears to be at an extreme apex on a weekly basis and it could very much signal a market bottom. At the very least, this market is truly oversold enough to see some nibbling.

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