Thursday, July 10, 2008

Textbook declining channel

The S&P 500 chart has formed a perfect declining channel pattern.


Every market trend like this has the same fate: it eventually breaks out. In the case of a declining channel, the direction of the breakout usually predicts what comes next. If the S&P breaks through the upper trend line, then there will probably be a limited rally like the one which occurred between March and May. On the other hand, if the S&P passes below the lower trend line, it would probably signal the start of a steep plunge.

Most of the indicators that I watch are still neutral, which implies that a short-term bottom isn't here yet. So I'm sticking with SDS, the ultra-short ETF.

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