Read the title.  I guess that’s how I feel about the sequence of circumstances in the chronology of how they unfold.

I’ve come across two interesting technical analysis articles.  One from website oldtimer Gregory Barton’s asiachart.com, and the other from xtrenders.  Both agree on textbook road to to breakdown that markets are taking, only differing in the pathways to the explanation.

Look at xtrend’s dow chart:

At the start of this mini-bull rally, I’ve always kept in mind of the dow’s 10,700 breakdown point last 2007, and reminded myself that that may be the target resistance of this rally.  However, being a PSEi trader and not a dow trader, I forecast a similar resistance scenario for our local index to reach 3,300.  What happened was as of last last November 2009 upto throughout December 2009, The PSEi stalled near 3000 to 3100 even as the dow Chugged upwards to 10,700.  Little did I know that their 10700 was it, time’s up, even though our PSei was not finished with the exam, the teacher wanted to “pass our papers, finished or not finished”.

Anyway, back to the articles in focus.  In barton’s analysis, he forecasts a return back to Dow 6,600, and though this seems likely according to Edwards and Magee on wedges theory, he would prefer a break below 10,000 to confirm.

“Breakout from the wedge is clear. According to theory, target of the wedge is the base – or 6,500. Let us refer to Edwards and Magee on the subject of wedges. I shall summarize in a few points:
1. The rising wedge indicates a “gradual petering out of investment interest. Prices advance but each new wave is feebler than the last”. This phenomenon is evidenced in the present wedge by falling volume throughout the pattern.
2. “Once prices break out downside they usually waste little time declining in earnest”. The dramatic two day fall on Thursday and Friday, erasing two or three months of gain, does tend to support this observation.
3. The rising wedge is a “characteristic pattern for bear market rallies.” It may be taken as evidence that “the Primary trend is still down.” This is the important issue: was the bull market of the last nine months the start of a primary bull market or is it merely a medium term bull trend in a long term bear? I would like to see the support at 10,000 break, in the shorter term chart above, before concluding that a bear trend has commenced.”

Xtrend’s scarier below 4k Dow forecast and claim “Therefore the market will continue to sell good earnings and severely punish bad ones in coming days.” has this paragraph becoming more relevant in the light of Friday’s selloff despite Way better than expected GDP, and good results last thursday from the likes of Microsoft, JnJ, etc.

*where SPX= S&P 500

“The process can take a shape in two possible forms:

1- SPX quickly dives to test 870-930 range then rally to test the highs between 1100-1170

2- SPX will bend at X3, forming an intermediate term rounding top right under X3 between 1050 – 1150. If this is the case, the highs will not be seen again, there will be no test.

My preferred pattern is #1 because most of the rounding-top-shaped bear market rallies were terminated with this type of double tops at the highs. The test of the highs will mostly be based on momentum with no reason, as all the monetary and economic fundamentals for higher equity prices will diminish. (They are actually gone already)
Also note that the corporate earnings topped out this quarter, and will gradually plunge in coming quarters but this is not very important as the rally off the March lows mostly created by government intervention of the credit and futures market, not healthy economic and earnings improvement. Therefore the market will continue to sell good earnings and severely punish bad ones in coming days.

In short, X3 on SPX terminated the rally off the March 2009 but we will likely have some sort of sharp intermediate term zigzag between 900-1150 before the death body starts sinking towards the bottom of the ocean where it will possibly find a bottom between SPX=270-350”

“My other prediction was decopling between equities and other major markets. This also is happening. During this transition period (double top), Equities will completely lose correlation with bonds and currencies. This process in fact already began. Decoupling between Equities and Currencies as well as Bonds and Equities became quite visible in the last few weeks. I believe Commodities will also be a part of the dissolution. In other words, Commodities may diverge from bearish equity trends, may even rally or stay range bound during the “C” wave plunge in Equities. By the time the entire topping process is complete, Equities should no longer move in tandem and this will be the most obvious confirmation for the beginning of c-wave”

So whether whatever fundamental reason may crop up like Greece defaulting, or continued bank reserve tightening from China or America, one thing’s for sure, whether a person believes in technical analysis or not, if enough people believe in this and stay away from the market, or sell on the market because of these breakdowns, even non-believers will be affected.

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• DMN March 4
• DMN March 3
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• DMN March 1