Subscribe By RSS
Rounded Reversal Underway In Stocks
By Corey Rosenbloom on March 5, 2009 | More Posts By Corey Rosenbloom | Author's Website
I highlighted this possibility last night to a few people but now it appears confirmed that the US Stock Market - as described in the DIA (DIA) - is completing a short-term (intraday) Rounded Reversal Pattern that appears to be setting up a counter-trend rally.
DIA 15-min:
If anything, this serves as an excellent example of the components that make up this pattern.
Price, in a downtrend, forms an initial positive momentum divergence (lower price low on higher low in the oscillator) and then comes back to form a support level as the momentum oscillator continues to rise.
Price then makes an upward thrust (into $68.50, or resistance via the 50 EMA) on a new momentum high, swing back to test support, and then completes a mirror image of the down-move that formed the pattern in the first place.
Price breaks above the key EMA resistance and then finally the averages cross bullishly. The “Cradle Trade” I’m so fond of sets up as price comes down to test this EMA confluence (cross-over) level, setting up the highest probability buy point (because you have enough evidence of a possible reversal and also a very tight stop if wrong).
There’s no guarantee we’ll keep moving higher of course, but odds do seem to favor a counter-swing rally up which would likely form an Elliott fractal 4 Wave up in the larger (5) wave down.
But if Elliott isn’t your cup of tea, then odds seem to favor a retracement rally up perhaps to $72.50 or even - theoretically - as high as $80 (which would be a very big move) as the next likely swing. A more realistic target would be near the $75.00 range.
Of course, any bullish case is defeated with a penetration of support at $67.00 (6,700 in the Dow Jones (^DJI)).
Subscribe by RSS 
Subscribe by Email
Email This Post To A Friend
Does the gap down day on March 6 change this picture irrevocably?
It does, yes, particularly as yesterday’s high was formed on a negative divergence. The Rounded Reversal achieved a target just shy of the prior gap and today’s action took out any stops for the pattern, whether the stop was trailed upwards in the price arc or beneath the ‘floor’ of the pattern (which you should trail a stop - shouldn’t leave it resting in this pattern).
There is no longer justification to play for a Rounded Reversal when the bottom of the ‘cup’ has been taken out.
Thanks.