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We'll See A Bounce, But Not The Bottom Yet

|Includes: QQQ, SPDR S&P 500 Trust ETF (SPY)

 

 

 

 

 

 

In the Chart of the Week (COTW) dated Monday 9/17/12, I showed you why a short-term correction was near. This was regardless of the bearish October Phenomenon. As I said then, the time of year alone is not a reliable guide without other factors being in alignment. Those factors are - the right price action and speculative bets being placed on higher prices.

In that COTW I showed that this was happening and it virtually insured a short-term correction was close. As we know now, Friday 9/14/12 was the high day of the current move. If you would like a copy of that COTW you can e-mail me atgreg@pristine.com or e-mail counselor@pristine.com for it and it will be sent to you.

In the chart above, the S&P 500 is displayed by the ETF symbol SPY. The bulls attempted to hold the prior low in the 143 area of SPY last week, but could not. With an area of Major Support (NYSE:MS) in the 140 area, it's an obvious place to except a bounce from.

Ideally, prices would drop straight down into it similar as they did from early last week. This would create a small Pristine Price Void (PPV) for prices to bounce up into. Assuming we see this setup, I would not play this as a swing trading long. Meaning, I will not hold for a few days, since what is needed for a bottom is not yet in place. Rather I'll use the area as a reference point where the intra-day time frame will bottom and start a short-term uptrend.

Historically, correction bottoms do not occur without the majority convinced that the market is going lower and they make speculative bets on that. We are not seeing that yet based those option traders that are typically on wrong side near turning points. These are the under-capitalized, overly-emotional traders that bet big at the worst time. I've used their actions at a guide for many years and they rarely fail to signal when the turn is near. When these traders start loading the boat with put options (bearish bets) the odds are that a tradable low will not be far off.

Lastly, let's look at the NASDAQ 100 index ETF symbol QQQ

In the above chart is a Head & Shoulders pattern that formed in the NASDAQ 100 ETF symbol QQQ. The pattern is simply a new high that has failed (longs are caught) and break of prior support. I typically don't show or talk about the esoteric types of analysis that I studied in the past. However, I thought I would show this and how it aligns with the simple technique taught at Pristine.

The Head & Shoulders top theory is that the vertical length of the area between the head of the pattern and the neckline (the base) will give you the point where prices will decline to by projecting the same length below the base. In the chart, you can see that I've drawn a line from the head to the base and then placed a line of equal length from the base going lower. That is where prices should decline to.

Well, based on the simple analysis of what was resistance becomes support, we see that the Minor Support (mS) area is the same as the measured low projection. I studied this many times years ago and it was virtually always the same. The projection lined up with an area of price support; it could be a minor or major area. The other lines below are simply other price support reference points to be aware of should the decline continue lower.

Complex analysis tends to impress us when starting to learn about trading based on technical analysis. We are conditioned to think that the markets are complex and it's needed. Most online trading courses are based on this type of analysis. If you have to buy software or indicators to trade be wary of such education. If your charts of filled with things like indicators, wave counts, Fibonacci projections, etc. The only thing you can be sure of is that the confusion will continue. There is a simpler, easier to understand way of trading the markets; it's Pristine.

PRISTINE - A trading style often imitated, but Never matched.

All the best,

Greg Capra
President & CEO
Pristine Capital Holdings, Inc.