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We Need A “Test” to Form a Bottom October 17, 2014

Posted by Tom in Thoughts.
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Many folks are saying this weekend “Wow . . . what a week !”  As you’ve no doubt heard and can see in the chart below, we’ve had another volatile week.  Wide spread bars and fairly high volume.  This is typical of investors in a hurry, but there likely is no big rush here.

NASDAQ

The reason is what we need to see is some type of base / structure forming in this area.  I’ve labeled Wednesday (that wide bar at the bottom of the chart, with high volume) as a possible Selling Climax (sc).  Then the reaction bar on Friday as a possible Automatic Rally (ar).  This price action is text-book Wyckoff Theory since structures are rarely V-shaped.  I also note that Fridays High price stopped right near the reverse trend line (solid red line, parallel to the dashed red).  This give the Friday top a little more validity.

Now what?  According to theory we need to see a “Test” near the low price on the Selling Climax.  That “test” would likely be a narrowing price bar on lighter than average volume.  The logic is: “are there any more sellers out there?”.  If the volume is light, then the answers is “no, not here”.  So let’s see if we can detect an Accumulation structure (the “smart money” buying) in its early stages.  That’s tricky, since structures do not need to be horizontal in order to form a base to allow prices to spring higher.  The other scenario IF we don’t getting a “test” is for the market to go lower, and likely it would do so on high volume (i.e. “yes, there are more sellers out there”).  Volume will confirm price action; “cause and effect”.

The “Money Flow” indicator at the top shows improvement; at least it’s headed toward Neutral.  That helps support a basing action.  Market Sentiment (the blue line in the middle) remains at the bottom and hence is “Bearish” for the time being.  So . . . we need to test the lower price range and see if there are any more investors that need to sell.  Then, maybe we can establish a real trend higher.  if not, well then, we would have seen the bottom yet.

Take Care and have a good week.          ………………  Tom  ……………….

chart by MetaStock, used with permission

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