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Posts Tagged ‘Technical analysis’

Brown leaves in the Nasdaq

Posted by Dan on April 7, 2014

Remember the “green shoots” that government officials like to talk about whenever the economy is weak and elections are near? They never talk about “brown leaves”. But markets are more honest, they show us brown leaves as well as green shoots in a candlestick chart. This week we have what I call a “brown leaves” formation on the Nasdaq, signaling the possible start of a market autumn:

brown leaves

This is not an official technical formation, but perhaps it should be. Brown leaves happen when after a significant rise in the market you get a top followed by two lower highs with subsequently lower lows in between. So, three clearly distinct legs to the downside, each time falling lower and trying (but failing) to recover the losses on rebound attempts. The third leg down should partially overlap the first leg down and there should be relatively few good green candles within the pattern, as you see in above example. This pattern usually forms within one or two months on a daily chart. This formation is not a good omen and often leads to a much bigger correction. The warning sign stays in effect until the market takes out the high that started the brown leaves formation, or until a significant new low is made below the bottom of “leaf 3”.


The S&P 500 is holding up better than the Nasdaq recently, and is following the scenario we set out two weeks ago. The 1880 barrier was not overcome convincingly and now this market is starting to pull back as well (click for larger image):

s&p 500

Bearish divergences in my technical indicators are once again very prominent in this chart, and the S&P is starting to look increasingly tired as it keeps struggling to reach the upper boundary of its long term trend channels. We remain in a lunar red period for 10 more days, so more downside action is likely. The 1800 level is the first line of support, followed by 1750. The scenario for a test of the 1600-1700 area this summer remains firmly on the table.

Stay tuned,


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D Time

Posted by Dan on April 29, 2013

Markets recovered surprisingly well last week, but despite this recovery the lunar red period ended with a slight loss on the Nasdaq.
We now enter a new green period, what’s in store?

Here is the Nasdaq chart (click for larger image):


This looks like a potential double top.
We cannot rule out a further rise to 3400, especially in an eclipse green period as discussed last week. But my Earl indicator is in peak territory already, which is a warning sign that another leg down can start any moment. The Earl2 is still not showing a buy signal either.
The LT wave has continued to do well, and it is also showing weak for May, especially for the second half of the month.
This means we have mixed signals, and even though a potential rise to 3400 is in the cards, the odds for a serious move into the other directions are not small either.
It is decision time for this market: either the resistance at 3300 gets broken convincingly, or we get a sizable drop to the 3000-3100 range.
Because the picture is so mixed I will just watch from the sidelines this week.

I just don’t see a good risk/reward ratio in either direction at this point.
This market starts reminding me of the 1993-1994 period. Most investors were not overly optimistic even though the market was setting all time highs. And everybody was waiting for a much needed correction. But the stocks just kept grinding higher with only some small pullbacks of 3-5%, and then in 1995 they started going up even faster. Those who were betting on a correction just lost money month after month.

Hopefully we will get more clarity by next week.

Stay tuned,

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Long term Nasdaq chart

Posted by Dan on April 17, 2013

This is an update to the long term outlook we presented in February.

We pointed out that the 3200-3300 level on the Nasdaq was going to be a tough resistance zone. And indeed, the market has now spent several months trying to overcome that level, and failing so far, with the Nasdaq currently sitting at 3264.
So, for all the talk about an unstoppable bull market, the Nasdaq is only 50 points higher than it was in mid February.

Our forecast was made on the basis of this chart, now updated (click for larger image):

Nasdaq long term

We can see that the large arc formation remains in play.
Notice how we have had four equidistant declines/bottoms within this arc formation, which may call for another bottom by the end of 2013.
Also notice how we got three equidistant peaks, which point to a possible fourth peak right now.
If this pattern holds up, then look for an initial decline towards 3000 support level. Then a rebound, followed by another leg down in autumn or winter of this year. The scenario is drawn in thick orange on the chart.

Only a clear breakout to the upside, which becomes evident when the Nasdaq climbs to 3350 or 3400, would move this scenario off the table.

So, I have sold most of my stocks by now, only keeping some core holdings. If I am wrong then I can buy back when Nasdaq reaches 3400, and will have given up a potential 5% of my profits. If this analysis pans out, then I will be able to buy back my stocks 10-20% cheaper somewhere down the road.
That’s what I call a good “no-risk/reward ratio”.
At major crossroads like this, markets trying to overcome resistance levels, I prefer to let other investors do the heavy lifting and I try to pick up the somewhat “easier” profits that come in between.

Stay tuned,

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