Three Possible Scenarios, But This One Is The Most Likely

  • September 22, 2004
  • Rob Hanna

Although I typically try and focus
the column on trading ideas rather than market action, I felt today’s
moves in the indices required me to write a follow-up to Monday’s column.

On Monday we looked at how the weekly downtrending channels
were colliding with the daily uptrending channels.  My point was that this
situation could not last much longer and should be monitored.

Today we got the answer to which trend channel would break
first.  Unfortunately (for bulls), it was the uptrend.  Below are the updated
daily charts from Monday —  

 

 

So what does this mean?  Where do we go from here?  Here are the possibilities
as I see it along with my thoughts —

1)     
A brief, sharp move to the downside followed by a quick resumption of the
uptrend.  Other than posting a distribution day today and breaking the uptrend
lines, the market hasn’t done a whole lot wrong just yet.  Every bull move
requires doubters, and quick shakeouts are one way to achieve this.

2)     
A sideways consolidation before another leg up.  Just because a trend
ends doesn’t mean another one is about to begin.  If anything, 2004 has taught
us that.  I see this as the least likely scenario, though.  The market has
already waffled for a significant amount of time.

3)     
The weekly downtrending channel takes control and the market begins to
sell off again.  I still have doubts that the August bottom will prove to be a
significant low.  As I’ve mentioned before, the lack of both capitulation and a
strong rebound were very uncharaterisitc of successful long-term bottoms. 
Although the S&P rallied for about 6 weeks, it still sits only about 5% above
those August lows.  It wouldn’t take much to reach and then exceed them.  Should
they break, I would think that might actually put a scare into the market.  We
may then witness that capitulation after all.  This could then pave the way for
a strong rebound and subsequent rally, in the process providing a more
opportunistic bottom for traders.  Of the three scenarios, I believe this is the
most likely.

 Best of luck with your trading,

Rob


robhanna@comcast.net

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