In my last few articles, I’ve talked about how overbought the market is, and how we are seeing a successful short-sell pattern show up on the charts of many leading stocks.  Now is the time to be prepared to make the most of it should the market move lower and trades from this pattern trigger.

And that is exactly what’s happening this week. Read on below to learn more about this pattern and how to trade from it…

Earlier this week, the market broke into new highs, but after the initial boost it pretty much fizzled into a big yawn.

The thing that really has market technicians excited right now is the fact that Thursday is the 50% Fibonacci time window of the whole bear market.

In plain English, that means that the whole bear lasted 17 months, and right now we’re sitting at 8.5 months into the move off of the bear lows. That’s significant because we’ve also seen a 50% gain in stocks since the market lows back in March. Take that 50% time move, couple it with 50% Fibonacci price levels being touched on the indexes, and you’ve got confluence here.

That’s why right now is technically significant.

When looking for opportunities to deploy new dollars in the market, all that matters is the short-term uptrend off of the November lows — that’s what we’re watching.

And as you can see from the chart above, it’s not anywhere near where we want to consider being buyers on the long side, because we “buy the dips and sell the rips” and the daily charts are telling us that we’ve just been ripping into higher territory this month.

Opportunities on the Short Side

But on the short side, we see lots of opportunities — all of them in the form of the First Thrust Down/Pullback Off Lows pattern. More on those in a minute…

In addition, when looking at the indexes, odds favor those on the short side than those on the long side — why? Well the indexes are all pushing the upward trend channel resistance with well into extreme overbought territory when viewing the daily charts.

So when you combine that event occurring in each of the major indexes along with the formation of a classic short-sell set-up in many individual stocks and some ETFs, you have a good combination where odds of success are much greater by betting against stocks right now.

Remember — it’s all about trading in tandem with the market. If the indexes are at resistance and you have a list of stocks that are showing a breakdown could be imminent, those are the issues you want to focus on until that trend changes in both the indexes and other individual stocks.

First Thrust Down / Pullback Off Lows Patterns

So, what about those First Thrust patterns I mentioned earlier?

In essence, a First Thrust is a potential transitional pattern as a Change in Trend occurs from up to down, or from down to up.

For this article we will be focused upon the transition from up to down — after all, we’ve already talked about why we’re looking at the short side of the market.

In order to give you a better idea of what these look like from a chart perspective, below are a few examples of past First Thrusts that have occurred, which were followed by deeper consolidations.

Notice the Blue box in the charts above? Those blue boxes are your first thrusts down.

After a first thrust we look for a snapback rally (everything above the Pink Line), these can range in duration from 1 week, up to 6 months, but all of these snapbacks have that same look and feel to them when all is said and done.

After an issue (or index) stages a snapback rally, it’s time for investors to really be watchful. This is when the market shows us whether or not it will find support, or if it will go on to deteriorate even further

Numerous issues as of late have staged First Thrusts downward, and from here forward it is all about seeing if they are going to be short-lived snapback rallies, or if sound new bases are going to being built.

Over the coming weeks and months we will get our answers. If we start seeing these snapback rallies fail, then we’ll know which way to lean and then be ready to trade accordingly.

As you build skill and grow to understand more about technical analysis, you will be able to take action with greater confidence trading based on what you actually see in the charts is critical to removing the guesswork of investing. After all, if you own stocks at a market top, you need to know when to get out; and if you are short stocks at a market bottom, you need to know when to buy and cover your position.

Sincerely,
David Grandey
AllAboutTrends.net

November 20, 2009

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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