Hi Ground Zero,
Looking at the weekly DOW-30 chart and the OEX we do indeed
have weekly reversal patterns at least according to John Murphy's
definition.
"A weekly reversal is another simple market formation that's worth
looking out for. An upside weekly reversal occurs during a market
decline and can only be seen on a weekly bar chart. A stock
starts the week with a lot of selling and usually breaks under some type
of support level. By weeks end, however prices have turned dramatically
upward and closed above the previous week's price range. The wider
weekly price bar and the heavier the trading volume, the greater the
significance of the turnaround.
A downside weekly reversal is just the opposite. Prices open the week
sharply higher and then collapse at week's end. While that pattern
alone isn't enough to turn the chart bearish, it is enough to warrant
a closer study of the situation and to consider taking some type of
defensive action. Weekly reversals take on more significance
if they occur in the vicinity of historic support or resistance levels."
There is a different type of weekly reversal defined by Edwards
and Magee. Their weekly reversal is composed of an upward
or a downward spike in the direction of the trend accompanied by large
volume. This usually indicates an end to the current trend as all the buyers
or seller are either in or out of the stock. Such reversals are usually
followed by disappointing moves.
There was a good articles on weekly reversal in the November issue
of the magazine "Technical Analysis of Stocks and Commodities".
along with a statistical study of weekly reversal patterns and
their effectiveness for trading.
The conclusions of the article were based on a sample of 300 stocks
over the last 2 years, so there are limitations to the statistics
as the statistics were during a bull market:
1) Upside reversals were on average about 70 days.
2) Downside reversals lasted about 6 weeks on average
before a significant trend change occurs.
3) Volume is not as significant as believed. Weekly reversal
can happen on medium volume.
4)More than 3 out of very 4 reversals predicted a reversal of the trend.
5) Upside reversals had an average rise of 37%.
6) Downside reversal had an average lost of 13%.
I think it is important to emphasize that the reversal pattern should
not be your only indicator. You need confirmation from other
indicators and the fundamentals and the news should confirm you read.
For the DOW 30 ,Stochastic 14,3,3 is bearish and indicate
that we still have a ways to go before we reach an
oversold state. 9 day RSI gives the same indications
as the stochastic. MACD 12,26,9 just gave a sell signal.
ADX just crossed above 20 from below indicating
the start of a trend. Willams 10%R is -88 indicating
it is approaching but not yet oversold.
The range of the index pierced intraday the 200 day
moving average but closed just above it.
This is a key support level. A break of this level
could take us to 7000.
We are about to enter earning season and the overall
mood at this point is bearish so any down
trend will probably to be exaggerated.
The effects of the ASEA problem is still yet to be
determined and will probably not really be
known for months.
MOT ,an important component of the SOX, reports
Monday after the close. They are
expected to miss or only meet estimates and
report weak forward looking guidance,
Overall I agree with your read of the charts and
your strategy. I would short stocks with strong
down trends into any rallies for trading purposes.
Long term, I think good values are starting
to appear if you can hold for more than 2 years as most
bear markets last about 18 months. There is no
indications we are in a bear market, but the
beginning of bear markets are usually
called in hindsight not predicted.
Harry
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