Stock Market Analysis

Monday, July 15, 2013

Exhaustion Peak + Double Top?

The Dow slows its advance as it gains 19 points today despite a much better than expected showing on the Empire State Index.

The past two weeks has been extremely crazy weeks with the US market suddenly caught in the hysteria of better than expected economic data and surging straight up. Indeed, US economic data has turned in surprisingly strong this month so far but what's even more surprising is the willingness of investors and traders to buy straight into the better numbers in the middle of an intermediate correction. Does this mean the end of the intermediate correction?

Not really.

This steep and strong climb not only made it hard to find good entry points but also resulted in two nasty technical patterns; A Exhaustion Peak and a Double Top. An exhaustion peak is when there is sudden and sharp buying resulting in an extremely steep climb which eventually results in the drying up of buying interest and a subsequent sharp drop back to the mean. Such exhaustion peaks usually tee off near significant resistance levels and in the case of the Dow, it is the May high. Failing at this level forms an even nastier formation... an intermediate double top. Double tops are extremely powerful bearish formations and once completed at this level, can see the Dow go down to 14,000 or lower. The VIX turning higher today despite a positive day also suggest a turning around downwards as volatility recovers from its recent crunch.
(Read more about Volatility Crunch)

With the way retail sales slumped this month, economic data going forward might look a bit shaky as it enters yet another period of volatility. All in all, this is when I will be very careful about short term bets to upside.

for now, the Dow remains in short term bull trend within an intermediate neutral trend and primary bull trend.

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