Notice how the truism of trendlines is demonstrated here. A broken up trendline warns of an impending trend change.
At this moment price is in a very interesting and suspenseful place. The trendline was broken by a down power bar, which is usually a good signal (to make a trade on). But so far there has been no downside follow through.
The heart of our teaching is that every wave, up or down is followed, without fail, by a wave in the opposite direction — or, and mark this, a sidewave. With amazing dependability these waves can be described with a trendline drawn by a ruler. We will not get into the intricacies of this model of market behavior at the moment — and, indeed, there are intricacies.
Concentrating on the moment, it seems to us that the market is at a tipping point — eye of the hurricane might be too dramatic, but what’s life without a little drama, as Arthur Miller said to Marilyn. Or perhaps, if you’ve watched your portfolio tossed about by the market waves since April, hurricane is the word you would use.
This wave (basis Dow) is 41 days long and a reasonably good trendline on the wave has been broken. Price is also right into stiff resistance as indicated by the horizontal line. It is not unreasonable to wait with bated breath (see hurricane eye) for a resolution to this question: either a sell off or more sideways action. We are five days into the drift pattern and the problem could always resolve itself with another surge upwards.
Our students and readers know that we always counsel regarding the inevitable downwave as a friend rather than an enemy. Well, friend might not be the exact term, or some colorful epithets might precede it. But the downwave does one of two things: it hits the stop and ends the trade, or when it sets a new Basing Point it allows us to raise our stops and lock in more profit.
Attempting to outsmart the market (your humble correspondent guilty of this from time to time) usually results in cheating oneself of the full fruits of long trends.
Our letters over the past 10 days or so have discussed in some detail stops readers could set based on their personal styles and risk tolerance.