The market tacked on another positive week — its 6th consecutive — and like the week before, it ended Friday with a modest gain on rising volume.

So here we are again:  We have a market that is short-term extended with lots of stocks very extended (more on that point in a minute).  And the markets are still close to areas of prior resistance as you can see from this chart of the Dow — in this case the Dow is right at the top of a 7-month downtrending channel with the full stohcastics once again in extreme overbought territory:

So what do we do now?  Well, the chart of the Dow is telling us if we are long to take profits and consider going short.  We also have the Dow Industrials in a 60 minute frequency showing what one could say is a break and backtest of the rising bearish wedge we showed recently.  And that pattern is still in play…

Notice how the news driven, program trading, options expiration led upside spikes since the 1st of the month are getting smaller in size?   Notice how basically this index aside from Friday’s move hasn’t really gone anywhere?  You wouldn’t know that by watching TV (they all say we are going to the moon… which is also by the way exactly what you’d expect to hear AFTER an index has been on a tear).

Now what are stocks that have led this 6-week rally telling us?  Let’s take a look at some of the leaders:

What we see when we look at these stocks are stocks that are very, very extended from any area of meaningful support and are well overbought.  Surely no low risk long side entry points can be had in these names at their current levels. So when you combine this with what the charts of the Dow are telling us, one could conclude that avoiding new buys and going short would be the way to go.

In addition to that take a look at all of these following charts. See any low risk Pullback Off Highs (POH) chart patterns here?

What do all these charts have in common? All have been on a tear. All have that short term POTENTIAL Double Top look to them.

When we look at charts, we are ALWAYS looking for one of three things:

1. On the Longside — A Pullback Off Highs uptrend pattern
2. On the Shortside — A Pullback Off Lows downtrend pattern
3. In a transitioning market — A Change in Trend pattern (up or down or down to up)

We are seeing longside and shortside patterns form in some of the leading stocks.  Just remember “Bigger Is Better”.  The bigger the base, the bigger the break.  And the bigger the pattern, the bigger the break– long or short.

So here’s where we stand.  Should a pullback in the markets be the pause that refreshes as — after all we’ve never really pulled back for more than a day or two as of yet — we will be ready to take advantage of that opportunity.  If the market continues its rally, we already have five nice long side set-ups on our watch list with more developing that we can take advantage should they trigger.  This is what we mean when we say you have to trade what you see…

Sincerely,
David Grandey
All About Trends

April 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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