A few days ago we considered the topping pattern of the market.
Now, as the market has rallied strongly this pattern has manifested in a slightly different way.
If we consider the chart below, note the shape price movement could make over the next number of weeks.
This quote from Stockcharts explains the M top pattern.
The above chart shows Exxon Mobile during Mar to October 2008. The M top develops in the April - May timeframe.
Now consider the current situation of the S&P 500 with my projected price moves:
If this is indeed the beginning of an M top, the pattern should behave in a similar manner to the above chart.
The key price movements to watch would be a higher high (perhaps to 1450 or 1460?) that remains within the upper bollinger band (dark blue).
Then price begins to move down somewhat and finally capitulates.
Negative divergence in the MACD as shown by the declining red line serves as another supporting signal.
The final and confirming signal comes with a close below the support break prior to the high.
Only with this final confirmation is the pattern valid.
Let's see what happens over the next few weeks.
Now, as the market has rallied strongly this pattern has manifested in a slightly different way.
If we consider the chart below, note the shape price movement could make over the next number of weeks.
This quote from Stockcharts explains the M top pattern.
In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal. The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security forges a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high, but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal.
The above chart shows Exxon Mobile during Mar to October 2008. The M top develops in the April - May timeframe.
Now consider the current situation of the S&P 500 with my projected price moves:
If this is indeed the beginning of an M top, the pattern should behave in a similar manner to the above chart.
The key price movements to watch would be a higher high (perhaps to 1450 or 1460?) that remains within the upper bollinger band (dark blue).
Then price begins to move down somewhat and finally capitulates.
Negative divergence in the MACD as shown by the declining red line serves as another supporting signal.
The final and confirming signal comes with a close below the support break prior to the high.
Only with this final confirmation is the pattern valid.
Let's see what happens over the next few weeks.
Comments
Post a Comment