Could the market be headed decidedly lower next week? An emerging technical pattern suggests that we could see a correction very soon as stocks continue to push higher and higher. Here’s everything you need to know to play the move without getting burned…

First, take a look at this chart of the S&P 500 index:

As you can see in the chart above, we just happened to stop on the pink uptrend line, and the full stochastics are still in overbought territory, which tells us we may still have some downside work to do next week. Stochastics, which measure a stock’s momentum, give us an idea of when shares of a stock or index are oversold or overbought.

And when the stochastics say that we’ve in overbought mode, the chances of a correction don’t bode well for investors…

A break of the pink line sends us to the blue line and 50-day average rather fast because that move up out of the sideways consolidation took place during low volume holiday trade.

While the daily time frequency chart shows us that some more downside work could still be in store due to the stochastics still up in overbought territory, the chart above (which is the 60 minute time frequency) shows the full stochastics oversold. Odds favor the full stochastics need to be reset back up into overbought territory before we move lower in the daily charts.

Moving On to the NASDAQ Composite

The indexes still have a ways to go to test some support levels as Friday was day one to the downside.  However, many names on our list have been selling off for days vs. the indexes. Many of these names were the leaders that were either pushed into year-end window dressing or have been on a tear recently.

I like to call them the “Follow The Screamers List”. These names are ahead of the market and will most likely be the ones to turn around to the upside first when the market makes a rally attempt.

Over a week ago we talked about the name of the game was to be on the lookout for chart patterns that were of a grand slam down to the 50-day average. Here we are today, and sure enough we’ve got a boatload of issues that have just grand slammed down to the 50-day average.

I’m a firm believer in paying attention to what the leaders are doing. If the leaders are pulling back, then the rest of the market isn’t far behind. Case in point, a lot of those names on that follow the screamers list were rolling over days before the markets finally gave it up on Friday by having one day basically wipe out the whole year-to-date gains.

The next few weeks folks we really want to be on our toes because there is a good possibility that we are going to be putting in a top here in the market, and we not only want to protect the long side of our accounts, but we also want to be prepared to profit by increasing our short exposure as patterns present themselves.

Sincerely,
David Grandey

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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