Tuesday, December 23, 2008

Update - P&F Charts Show Breakdowns...

The markets are continuing lower so far this morning, not recovering since this morning’s economic data.

Below is a series of Point & Figure charts that are generated electronically. I use these P&F charts to help identify key breakouts or breakdowns and to provide initial targeting data.

This morning’s action has produced “low pole reversal” signals on most of the major indices. They have all generated targets in approximately the same range, the DOW target being about 8,000 and the S&P about 810. The intraday action usually will not change these reversals or targets as once the technical level has been breached, it’s been breached. Spotting these breakdowns is not always as easy on a candlestick chart, but yesterday you will note that I pointed out breakdowns below the most current uptrend lines. These charts now are confirming that.

But I use caution with these charts as the other technical indicators are not in full agreement. Look at the VIX for example. It has broken down and has a target (computer generated) of just 20. The VIX going down further does not coincide with a fairly large move down in equities, although I note that is exactly what’s been occurring the past few days – the VIX has been going down at the same time equity prices are falling. That makes your choice of investment vehicles important. Using options with a falling VIX is not wise, but buying them after the VIX has fallen is terrific. In the mean time direct shorting or the use of futures is probably a better option.

Now, before you see these P&F targets and jump on the short bandwagon, keep in mind that the daily fast stochastic is now getting close to oversold and also that in the very short run the 60 and 30 minute slow stochastic have a ways to go before they get to an area where they would normally roll over. Right now the RUT looks weakest which is typical of declines. Right now I’m short, but very small, I’m still being protective as I know that there are still many crosscurrents, but I may add another small short position as the stochastic gets back up into the overbought range (if they make it there). There is a cluster of turn dates between now and the New Year, so any positions will be short term and I will be nimble.


Charts are courtesy of StockCharts.com; Click the chart to enlarge:


S&P 500

Wilshire 5,000



Russell 2,000 (RUT)