Above is a daily chart of the Dow showing a major high that was put in on September 19, 2008. Once that high was registered, the Dow fell over 5000 points in just a few months. September 19th this year falls on a Sunday, so perhaps sometime late next week or early the week of the 20th the stock market will form another major top. It lines up well with the VIX stock market sell signal being talked about as well as other overbought indicators I'm tacking. We'll see.
Looking at the 30min Dow charts on the rest of this post it seems evident that at least in the very short term, the evidence is building toward a decline. The RSI diverged quite drastically from the recent price high the Dow has made, suggesting that the follow-through to last week's rally is truly running out of gas.
Also of note is the fact that the high risk small cap Russell 2000 index did not confirm the new highs today that most of the major indices registered. The Nasdaqs have been on fire lately so I'm not sure if that cancels out the weakness in small caps here. But it's still something to watch, and it's just another piece of evidence suggesting a top is forming.
As for the EUR/USD, it hasn't quite broken out yet but is trading heavy right now. The path of least resistance is to the downside but a breakout higher into the high 1.2700s would just bring about a better opportunity to get short.
EXPERIMENTAL STUDY
On pages 17-18 of Elliott Wave International's Ultimate Technical Analysis Handbook they discuss a tool that can alert you of future price expansion. The idea being that the market continually expands and contracts, and using these 3 movning averages it helps illustrate the expansion and contraction phases to give a better idea of possible breakouts. When the averages become contracted and "spaghettied", then price should soon expand in the near future. It also appears that as long as the moving averages are trending expanded, then profitable positions can be viewed as "safe" for the time being.
So I thought I'd experiment with it here. Above you can see a 30min Dow chart that shows the moving averages contracted and spaghettied with each other. So we see the market is in a contraction period, so a price explosion could be coming soon. Also notice the MACD at the bottom of the chart showing the same flat formation near the zero level. It too wants to break out as well.
Unfortunately these indicators don't help us with direction, we need to use other methods to give us an advantage there. But with the case I've been laying out over the past few days, I think the expansion should result in a move down in my view. However I do want to be clear that I'm using a 30min chart here so the move, whether up or down, might only be a move for a day or so. But with the evidence piling on that a major top may be coming soon, I'm paying close attention to any short term tops that arise since they can easily turn out to be a big one.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.
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