How Hard is it to Game This Market? Hard!

March 24, 2006 14 Comments

For every index chart I analyze, I can make a case for it ripping higher or dropping lower.  It makes this market extremely hard to game which is why I’ve bought a fair amount of straddles.

First, looking at the Dow Jones Industrials I see both a bullish and a bearish interpretation.  The index is either going jump higher off of an "upward sloping springboard" pattern or it’s going to dive lower from an "overthrow" of the fifth leg of Linda Rashke’s Three Little Indian’s pattern (or Bill Wolf’s Wolf Wave pattern).   

Indu_032406

The upward sloping springboard usually occurs just prior to massive blow off top runs.  The last time it came into play was in December of 2003.

Spx_springboard_2003

So based on the INDU chart, I can tell you the market can either go higher or lower.  And I can make a similar case for the NASDAQ and QQQQs gunning higher or tanking from this level.  Most all technicians are currently fixated on the head and shoulders pattern forming in those indexes.  That should be a huge negative, but this pattern can turn out to be a mirage for the bears. 

Qqqq_032306

I have found that the first head and shoulders pattern you see on a chart is often a false one.  Why? Because lots of traders see it forming and go short before the pattern activates.  If the pattern doesn’t activate by breaking the neckline, those same traders have to cover their bearish bets, which in turn sparks a strong rally higher.  Interestingly, failed head and shoulders patterns are often used as a primary example by critics of technical analysis as proof that charts analysis is worthless.  However, there’s just as much information built into a failed head and shoulders pattern as there is in a completed one.  The rallies out of a failed head and shoulders pattern are often just as powerful as the breakdowns from a completed pattern.  The Housing Index (HGX) is a primary example.  The first and second failed H&S patterns lead to massive short covering rallies.  But the third one completed as advertised and caused a rapid break lower. 

Hgx_head_and_shoulders_patterns

So am I bullish or bearish at this point?  Neither.  I’m just betting on a big move one way or the other. 

14 thoughts on “How Hard is it to Game This Market? Hard!”

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