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Blah, Blah, Blah, the Markets Went Down Because the Technical's Suggested it would Happen, Why Comes Later!

This week was full of big news and global events. The bobble heads on TV were running frantically to get ever stupid sound bite from every corner of the market while operating extended coverage. I've often thought they acerbate market fear in the individual investor with their over coverage of negative data. They also do the opposite and stoke greed at tops, as well. I never expect this to change, because it benefits them by creating ratings to sell advertising, which is the business they are really into and I complement them on a job well done.

The market gave clear warning signs the market was a ready for another pull back. At the top, the market made two Evening Stars (candlestick patterns) with a negative divergence on the RSI. It was followed by a small head and shoulders pattern break down. And then, a break below the 50 day MA followed.

I suggested a few days ago, the markets would repeat recent history, and break below the 50 day MA and widen out the Bollinger Bands confirming a correction was in place.

Step by step, the market gave off great and somewhat easy clues it was time for a pullback. No, I didn't expect it to come in such a short span of time, but I did expect the point total we've seen so far to the down side.

The correction was bound to be swift given how massively one sided every (EVERY) sentiment indicator had been on this low volume rise. The market was so ripe for this, it wasn't hard to call. Something I never heard from the bobble heads. Technical analysis always leads the news, the news, what ever it is always confirms what has already occurred.

It doesn't matter whether it was a fat finger or a trading error or Greece, or maybe the "Pickle Split and Hit the Boat". The market was ready for a correction, and one way or another we would have gotten the sell off we've seen on some time frame.

In fact, had one read my blogs from the January 2010 Peak, you would have followed the market giving off some of the easiest technical analysis in the world. No, it's not always that easy. Below is the daily chart of the Dow Jones Industrial Index.

Dow Jones Industrial Average Showing Head and Shoulders Pattern

All the babble on TV has turned out to be nothing more than market noise, which I can only guess confuses the individual investor and creates investor paralysis. The market went down right when the technical analysis suggested it would, why it went down followed as it usually does.

I can't recall anyone one from the boob tube suggesting taking chips off the table and protect gains. Maybe a few did, but it's drowned in a sea of competing opinions in the he said she said approach to journalism, that only go to create investor paralysis.

I gave the call to protect gains, and the timing was quite appropriate. And I don't want to hear from the options crowd they suggested to buy puts as insurance. As correct as that is, 99% of individual investors are never going to use that as a strategy and we already know that and we're never going to convince them of such methods for their own use. They only think in buy or sell an asset.

A great friend and a strong individual investor asked me today, "where is market support now". Below is the weekly chart. Notice the prior bottom in February 2010, the bottom Bollinger Band, and the 200 week MA are all about the same price zone just below 9,900. That creates a cluster of support, so my answer to him, "was that very price zone for those reasons".

Dow Jones Industrial Average With Bollinger Bands

We have bearish signals with the market closing the week below the uptrend line, and the MACD rolling over on the weekly time frame. The daily chart with it's widening Bollinger Bands suggest even with a market bounce, we should see more corrective behavior, especially if the over bought MACD on the weekly time frame continues to move lower. A further correction can be in price or time, or both.

We do need to keep an eye on the monthly charts, as the monthly MACDs are still rising from oversold levels. Where the month of May closes in price could provide another technical clue. An Evening Star could form on the monthly chart.

An interesting note: The market failed moving higher right at important Fibonacci resistance which also happened to be right at the top Bollinger Band on the weekly chart, and the 50 week MA, a cluster of resistance.

The last few weeks have been an easy one to recommend protecting gains, and being on the short side of the market. All week, we were rolling in and out of short positions. I expect market action to be very interesting the next couple weeks as volatile as measured by the $VIX has returned.

Hope all is well.


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