Requested Chart Example

Yesterday during the day, I mentioned the possibility of a bounce. I posted a few charts showing a possible "Tweezers Bottom" which is a candlestick pattern for a short term reversal. Then last night talked about the overwhelming price/volume relationship which was price down and volume up and 2X greater then the next largest relationship and how a overwhelming relationship like that ca produce an oversold condition. I talked about thinking about some longs, but decided against it because I myself would not have bought them, which I think was the right decision based on the fact that most of the gain came by way of a gap, so there wasn't much to profit from.

I any case, the request was for a similar situation to what we are currently in as I said this is one of the worst negative leading divergences I've seen since 2007-2008.

Here is the 2007 top which is remarkably similar to what we see now, more similar then I thought I would find.

To many of you this may look like the daily SPY charts I post every night, however it is not, it is 2007. Similar to 2007, we had early warning of a bounce, you can see that in August as price makes a new low and 3C a higher low-coincidentally it was the end of August when we saw the accumulation that lead to this last rally. Much like now, 3C refused to confirm higher highs and at the top went into a leading downside divergence.

Here is the current chart for comparison.

Here's what happened the next day on from the first chart above in 2007

The market started trending lower, but along the way they were several bounces. This is where trade management and commitment come into play. Anyone of those bounces that lasted a week to two weeks could have made you feel like the decline is over, you only know what you know at the time. This is why I say "try not to get too caught up in the daily gyrations of the market."

 The area in the red box is the same timeframe as the first chart above showing the negative leading divergence, or the top of the market's rally. The decline from there was 55%. In individual stocks it would have been 2-3X that as well as leveraged ETFs.

Keeping your eye on the bigger picture. For most people, including myself, I rely on an objective indicator so when a 1 or 2 week rally/bounce occurs, I'm not scared out of my position. The Trend Channel held the entire decline, not even one false signal. By early 2009 there were already signs of accumulation so your exact exit point would be difficult to pinpoint, using the channel it will never be at the very bottom, but as I said, there were signs the decline was coming to an end early in 2009.

Hopefully this comparison sheds some light on 3C and on the importance of an objective system to keep emotions out of the trade as well as illustrating, nothing goes straight up or down, there are always corrections, even in the best and most reliable trends.