Stocks sharply lower

indu0229.pngStock index gapped lower today and extended the downtrend for much of the session. The chart to the left of the Dow Industrials is very similar to the S&P chart on the post yesterday. The cash Dow went right up to the declining long term trend channels. I should point out that this channel is the standard error bands above and below a long term linear regression curve than has been further smoothed by an exponential moving average. I have used the same parameter set on this band for a very long time and have never changed the settings or curve fitted. It is amazing how many times that price will find support or resistance on the mid-point or one of the bands. The point of price hitting the regression curve also coincided with the pivot left on Feb 1st, where I drew the blue line. Also note the three bar pattern from Tuesday through Thursday, where there was an up candle, followed by the small range doji bar that hit the regression curve, and then followed by a down candle to complete the pattern, which also turned the momentum indicator down. It was not too surprising to see good follow-through to the downside today. The first objective should be the bodies of the candles on Jan 22nd and 23rd, where I drew the yellow line. If that doesn’t hold it would take much to take out the lows of those two bars. The Nasdaq is already trading into the tails of similar bars on its chart, as that market has been downtrending a bit more instead of the more sideways channel of the Dow and S&P. There is always the possibility of some good news that could turn this around. I’m not sure what that would be. The Fed has already signaled its intend on lowering interest rates and killing the dollar in the process. There isn’t too much room on the downside of interest rates. Even if they push them to zero, it would still be pushing on a string. There were several positive reports recently regarding the bond insurers with either funding or keeping their credit rating. Maybe some unexpected good news will surface, but if not the path of least resistance is down.
wheat0229.pngThe chart to the right is an update on the Wheat market, which I had on the post from yesterday. I don’t really trade or follow wheat, but thought the blow-off action was instructional, and possibly a hint of more to come in some of the other bubble markets. Early in the week I was hearing ridiculous price projections for wheat from many analysts, just like the wild claims for where gold and oil are going. It’s always possible that a market can blow-off like the wheat market did, and then build another base and take out the spike high. But buying into the hype at the peak of the market when price is accelerating exponentially is very dangerous, as you can see on this chart. Buying wheat at the height of this insanity on Wednesday would have resulted in over a $13,000 loss for each contract by the close on Friday. When prices go parabolic take profits while prices are going up, and let the other guy have the last few dollars of profit. It is very difficult to exit when everyone comes to grips with reality and all run for the exit at the same time.

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