Rubber necking

I rarely intend to be cute or coy with my post's titles, only to get you to perceive differently. Necker cubes represent an excellent example. (Go here for more understanding re Necker cubes.) You will understand immediately that the market, as a primary system, and chart pattern analysis, as a sub-system, each qualifies as a Necker cube; the difference is in the perception.

In the two charts below, I identify several trend lines and standard Fibonacci retracement levels.

[click on each image to enlarge]

The NASDAQ Comp is obviously the weaker performing index of the two; not only lagging on the upside but also having already broken down beneath its accelerated up trend line. Both charts show a bull trap -- the recent breakout to new highs that so excited most market observers and participants -- and then the subsequent and immediate lack of upside follow-through, instead returning to the prior late stage base, and then some. Needless to say, this is not positive action.

But "not positive" action does not itself equal bearish trend action. No, observers must examine the total picture to discern that particular reality. A loss of price momentum (apparent on each chart above), negative price reversals on good news, other price trend reversals on lack of news (failed breakouts, again like the two charts above), bearish trend line breaks, and bearish patterns fast dominate the charts, and likely will soon pre-dominate. I suspect the markets could meander for 1-3 days, and then decline with some measure of ferocity. Again, the timing I perceive (in my own personal Necker cube) corresponds with the after hours release of Google/GOOG's earnings report. But anything could be the catalyst for the coming negative market action.

The charts above show readily why and how I find initial downside objectives to be 1325-1275 (SPX) and ~2315 (NASDAQ). Those are initial objectives; market action dictates actual objectives. Readers familiar with my market perceptions might recall one item that especially intrigues me: the notion of resistance during an up trend and support during a down trend. What force stems a minor trend in the face of the continuing primary or major trend? That is, when the prevailing trend is up, why is it not straight up? (And vice versa.) Once identified, by identifying trend lines that connect the highs during an up trend (and the lows during a down trend), then and only then, can the more commonly drawn trend line (connecting the lows during an up trend; connecting the highs during a down trend) be identified via cloning the original line. This study therefore both identifies, validates, and possible prove the trend line of rising bottoms (during a bull trend) and declining tops (during a down trend).

I know; this all is confusing. I will leave off here, as how to identify correctly trend lines is not in the lesson plan for this post. No, I prefer to make the message clear: risk increases with each new day. The longer we levitate up here, the more ferocious the decline. Simple peak & trough analysis betrays that much, if not more.

I will scan the market for those stocks resolute in their defiance to the potential decline in the market at large. In time, those stocks should prove be the new leaders. I have shared thirteen (13) specific opportunities that appear (to me!) to be good candidates; your generosity betrayed another handful. Yes, I continue to purchase leaders despite my perceptions and concerns.

Leaders have their own agendas.
-- David M Gordon / The Deipnosophist