On May 23, I wrote about the market forming an ominous technical pattern. The pattern I discussed was an “outside day” which is a reversal pattern. Now, days later, the stock market has traced out another reversal pattern called an “island reversal.” You can see the pattern through the link below.
Please click here to see the chart.
On the chart, trading activity for SPDR S&P 500 SPY on May 28 appears as an island. On the left-hand side there is a gap, and on the right-hand side there is a gap.
On the surface, the PowerShares QQQ Trust Series 1 QQQ and iShares Russell 2000 Index FundIWM came close to an island-reversal pattern, but did not form it. However, when we adjust for volume looking at an intraday chart, the interpretation is the same as the SPY.
After a sustained bull run, an island reversal is a reversal pattern just like an outside day. If the island reversal would have formed at the place marked on the chart as ‘the ideal place for an island,’ it would have carried more weight. Unfortunately, markets seldom follow a script and we are left with reading the tea leaves.
We pay special attention to classical technical patterns because they are a key part of the seventh input out of the eight inputs to our adaptive timing model. This adaptive model is based on the following eight factors.
- Aggressiveness of fund flows
- Leading global economic indicators
- Commodity-price movements
- Relationship between currencies
- Risk appetite as demonstrated by the relationship between the price movements of the assets deemed safe vs. assets considered speculative.
- Price action of the markets at key technical support/resistance levels
- Price action of the markets as various classical technical patterns become apparent
- Changes in internals of the markets as the prices push through or fail at key support/resistance levels
This adaptive model automatically changes the weight of each one of the eight inputs described above based on market conditions. At present, the model is flashing a caution signal…Read more at MarketWatch
