I Spy … An Intriguing NYSE Composite Chart

Perhaps the most fascinating chart right now is that of the NYSE Composite. It features two developments worth exploring:

  1. Island reversal
  2. Bearish wedge

The NYSE Composite includes all stocks listed on the NYSE, about 1,900. Unlike the S&P 500 (NYSEArca: SPY) or Dow Jones (NYSEArca: DIA), the NYSE Composite actually reached a new all-time high on Thursday.

The new all-time high was short-lived and followed by a massive gap down the next morning.

Island Reversal

This gap lower created an island reversal. Some analysts consider island reversals indicative of a major trend change, but the Technical Analysis book by Edwards and Magee describes it as follows:

“The island pattern is not in itself of major significance, in the sense of denoting a long-term top or bottom, but it does as a rule send prices back for a complete retracement of the minor move which preceded it.”

It’s probably up to debate where the last minor move started, but at Friday’s low the NYSE Composite already touched minor support.

In addition, as Sunday’s Profit Radar Report pointed out, there’s an open chart gap, and the post-2009 bull market has filled every chart gap.

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Open gaps are like unfinished business, and with the gap closed this morning, the NYSE Composite doesn’t ‘have to’ move any higher.

Bearish Wedge

In fact, the NYSE Composite has formed a potentially bearish wedge formation (bold trend lines). It takes a break below the green trend line to activate lower targets, but last weeks island reversal throw-over top may be an early indication of an upcoming correction.

Trade Setup

Last week’s all-time high is important for the short term, and going short against it presents a low-risk trade setup with a favorable risk/reward ratio.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

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Is the Russell 2000 Forming a Bearish Wedge?

The Russell 2000 sports an interesting chart.

Here is what Wednesday’s (April 15) Profit Radar Report observed:

The Russell 2000 rallied to a new all-time high today. The chart shows a wedge, which is generally considered a bearish formation. RSI did not confirm today’s high and MACD is barely positive (blue bubble). The 2-day RSI is short-term overbought at 96. The Russell 2000 also touched the upper Bollinger Band today.

History suggests a pullback, sooner or later. Aggressive investors may short the S&P 500 (NYSEArca: SPY) or Russell 2000 (NYSEArca: IWM) against today’s high.”

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Well, the Russell 2000 pullback happened sooner rather than later.

However, the Russell 2000 is still within the rising wedge formation (and above wedge support). There are two ways to draw wedge support (solid and dashed green line).

Notice also the open chart gap created by today’s massive gap down. Such chart gaps have a tendency to be closed – sooner or later.

In summary, while today’s drop comes at the right time to start the initial validation process of the bearish rising wedge, the Russell 2000 still needs a break below support (on increased volume) to unlock the potential for much lower targets.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Dow Jones Pulls Back After Completing Bearish Wedge

On Friday the Dow Jones hit the ideal target of a rising wedge formation. The rising wedge is a bearish formation that projects about a 10% decline for the Dow if the lower wedge line (see Dow Jones chart) is broken.

The August 24 Profit Radar Report published this Dow Jones chart and stated that: “The Dow Jones sports a possible wedge formation with resistance starting at 17,250 next week (17,400 by the end of September).”

This red line has been our up side target ever since.

On Friday the Dow reached its target and pulled back as quickly as a hand accidentally touching a hot stove.

What makes a wedge a wedge?

Although prices rise within the rising wedge formation, market breadth is gradually petering out, as the advance is progressively growing weaker.

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That’s what we saw on Friday. Even though the Dow ended 0.08% higher, 60% of stocks traded on the NYSE declined. This rare breadth/price divergence occurred only 7 other times since this QE bull market started in 2009.

What are the implications of a wedge breakdown?

The Dow already touched the upper wedge side (red line). Once prices break out of the wedge down side (solid green line) they usually waste little time before declining and retracing all of the ground gained within the wedge itself.

So, a drop below the solid green line (currently around Dow 16, 700) could unlock a target around Dow 15,000.

But let’s don’t get ahead of ourselves. The stock market has steamrolled over many bearish setups before and may do so again. The pattern could also get more complicated as was the case with the LQD Corporate Bond ETF earlier in April.

If you want to take baby steps, trade below 17,160 and 16,900 (dashed green support areas) would be initial confirmation of further down side.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.