Weakness on the weekly chart of the XJO
A week ago, a Doji candlestick reminded chart watchers to take some profit from “off the table”. The doji on its own is not aways relevant, particularly if there are others in the vicinity. A Doji after a prolonged impulsive move without correction is much more significant.
Sure it was the banking crisis in Cyprus that initiated the fall. However the need to take profits is a powerful market force after such a bull run; to some extent at least, the market was waiting for such an event to trigger the pull-back.
The fall has been decisive. 153 points to be precise. It was a fall that broke the trend-line, and penetrated new support in the 4980-5000 range. 5000 is also the significant half way point between pre-GFC high, and post-GFC low. The closing point for the XJO this week was 4967.30; hardly a convincing break of support.
The day-to-day story of the past week
The big fall for the week came on Monday March 18. A completely unexpected 105 point fall. Sellers scrambled to get the best prices they could, and dumped stocks in a way that brought back memories and fears that we would be back to the GFC bear market. The selling continued Tuesday and Wednesday but was more considered without panic dumping of stock. The candlesticks for trading on Thursday and Friday were “almost Doji” appearances, (better perhaps called “spinning tops“) with opening and closing prices almost identical, as fears of further falls abated.
How much further will the market fall?
There is an obvious trading advantage in knowing the likely extent of the corrective move. It is foolish to pretend that the turning point can be foretold from the chart. What chartists have discovered is that statistically in an uptrending market, retracements are usually between on third and two-thirds of the previous impulsive move, with clustering around the half-way mark. It would seem that the number of sellers tends to wane as fears of further falls are allayed; but it is the return of more buyers that creates the turn-around. Buyers have to balance the risk that they miss out if they delay too long with the advantage of being able to buy more cheaply if they do hold off.
What determines when the market turns?
The exact turning point is not predictable, but should be watched for. It is the level of relative bullishness to bearish sentiment that determines whether this is sooner or later. In an overall bullish market such as we have had in the past six months or so, the turning point is likely to be at about the 38.2% Fibonacci retracement level. If bearishness sentiment is stronger, the market is unlikely to turn until about the 61.8% level.
On this basis the turning point is likely to be between 4850 and 4650.
- Market Focus March 13, 2013. ?A Time to take some profit off the table. (technicality.me)
- Saxo Bank Explains How Massive Stock Market Rallies End (zerohedge.com)
- Cyprus lawmaker Neofytou says important steps taken to positive outcome – BBG (forexlive.com)
- Yen May Rise While Euro Falls as Cyprus Fears Spark Liquidation (forextv.com)