Written Thursday, May 8th, 2008
TECHNICAL VIEW. Rising Wedges Run Out of Steam! We’ve formed Rising Wedge chart patterns in a number of key market averages, most easily seen in the Dow Industrials, the Nasdaq Composite and the S&P 400 Midcap averages. These chart patterns form on diminishing trading volume, just the trading background we’ve been recently having, and yesterday they finally just ran out of steam, out of buyers.
Sharp, Short Pullback Underway? The bible of chartists, TECHNICAL ANALYSIS OF STOCK TRENDS (1948) by Edwards and Magee state that the Rising Wedge is a chart formation in which “…its price fluctuations tended to grow narrower, between upward sloping but converging boundaries, while volume diminished.” The bad news is this pattern carries a bearish near term message. But the good news is that Rising Wedges are “…ordinarily Minor or at most only Intermediate in their trend implications.”
Schwartz View: Thus as I see things we should expect the stock market, meaning most averages to fall back to roughly the April 14th lows where I estimate these wedge patterns began forming. If so, that would bring stock index prices back down below my drawn and noted (to you all) uptrend channels. Breaking these uptrend channels should be enough to scare many traders out of stocks. But since rising wedges indicate just an exhaustion of near term energy and not (generally) any major turning point, this weakness should prove to be a buying opportunity. Best I can recommend is to find those sectors which give up ground the most grudgingly during this pullback and put some money to work in them, say in a few days. But only plan to stay around for a short time. Another passage in Edwards & Magee’s book starts with: “Rising Wedges Common in Bear Market Rallies.” Yep, that’s what it says. Paraphrasing and quoting the chartist’s “bible,” it says rising wedges after an extensive decline “…may be taken as evidence that the Primary trend is still down.” So, more evidence that what we’re in is a bear market rally. Maybe similar to the famous big rally after the 1929 crash. I mean George Soros, the famed international investor is quoted this morning as saying “the US economy is only now starting to feel the effect” of the financial crisis.
05-08-2008 9:55 AM
Filed under: Principles of the Stock Market, Richard Schwartz, Trading, Technical View, Dowtrend Channels, Keys to the Market, Day to Day Action, Portfolio Strategy, Market Corrections, The Principle of Technical Analysis, Rising Wedge