I mentioned yesterday that I was not interested in the upside at this time. Today you see why. I can’t take credit for calling this drop — almost every technical analyst I follow was seeing the same thing. Our concern was that when “everyone” sees a pattern, the market will sometimes make several false breaks before the real move. Today was the real move.
Today should NOT have been a surprise. If you don’t understand what I meant yesterday when I said “This is a classic setup for additional downside action“, dig out your copy of Edwards and Magee’s Technical Analysis of Stock Trends (see below) and spend some serious time studying volume patterns. Here is what my copy says when you look up volume in the index:
(Volume is of the utmost importance in all technical phenomena. Each chapter takes up essential points in connection with volume; and all chart examples demonstrate volume action and should be studied with this in mind.)
I know some very good technicians that never look at volume — I don’t think they understand what they are missing. Personally, if we had failed to make a drop similar to this I would have been very surprised.
If you were expecting a down move at this time, today was fairly easy to trade. We started with a gap down to yesterday’s low and then moved sideways for two hours. During that time the market pulled back 50% of the distance from yesterday’s high, and then the rest of the day was down.
Whenever I see a very strong move (up or down) I draw a Fibonacci retracement of the first pullback. The three key Fib levels are 1.618, 2.618 and 4.236. When we broke through 1.618 without a pause, that indicated a strong move.
We then tried to bounce at the 2.618 level for an hour with no significant upside progress. That set up the expectation of more downside action, and the next important level is where we closed for the day.
As I said yesterday, I expect a re-test of the bottom. That would create a large A-B-C pattern on the daily chart, with “C” being 62% of “A.” But remember, that particular pattern has two lower targets, and there is no reason matching the earlier bottom has to be the end of this down move.
[Read My Review] In my opinion, the BEST book about chart reading.
Edwards and Magee: Technical Analysis of Stock Trends
