Chart Analysis: Comparing Bottoms

Chart Study: DJIA 02-03 bottom vs. DJIA 08-09 bottoming - when, where, how and why!

Many are calling the bottom here - and there is good reason to do so. The above charts are the differences between the 02-03 bottom and this 08-09 bottom. There are many differences, but many similarities.

• 02-03 bottom went from 10500 down to 7500.
  
• 08-09 bottoming went from 13000 to 7500 - giving us an Oct plunge that started at 10500 and ended at 7500 - that single move was equivalent to the entire 02-03 bottom.

This is a big difference in the "amplitude" of the "phase", or the measurment of the top to bottom of the cycle of the 02-03 bottom and this 08-09 bottom. That's why this one hurt so much because it was faster and had a bigger plunge.

On the charts posted, you will see the calculated targets for the first bounce off the bottom of this new "cycle" or "phase". Here are things assumed in order to reach those targets.

• The bottoming formation of 02-03 bottom- Inverse Head and Shoulders: see chart for measuring technique and targets.
  
• The 08-09 bottom is showing a very similar HNS pattern, as many have been predicting and waiting to confirm: see chart for targets and analysis.

A couple of things I have been waiting for.

1. More Volume
2. Vix hits resistance area
3. New Highs vs. New lows continues in the right direction.

These all have been starting to show signs of dramatic improvement and confirming that the market could now be creating the right shoulder of the HNS bottom, and could now be ready to move higher until this summer - which will give a trader the best performance chances during this period.

Knowing this can also be a very tricky market where patterns emerge and dissapear, move in opposite of its original intention, etc. - risk management must be assumed.

PLAN #2 - Risk Management - possible scenario if we breakdown on the right shoulder here.

If this right shoulder doesn't hold with more volume to come, a possible breakdown to the 7500 retest would be considered the next support and also a place to then call for a bounce, or double bottom attempt. If that happens, then we will have a sideways market for the rest of 09 with a possible restest of the 7500 a third time sometime in Sept. or Oct. - and a day that would be a very scary moment, for sure, but I don't believe the probabilities are in this favor.

Mixed Signals and Weak Technicals - VIX and DJIA

The VIX's thrust to new highs from the 35-40 area to the historic 80 area in Sept. and Oct. brought the market to it's knees - from 11500 to 7500 in a month. Now the VIX is back to 40 and the market can't sustain any sort of rally that has legs - this may be problematic short term - and may be signaling more volatility soon.

VIX and DJIA show more range bound technicals and signals; even the possiblity for a scare of more volatility in the coming week or days. The last blog analysis of the VIX and DJIA relationship put the DJIA target at 9500 when the VIX would correct to the 50 area - it bounced and the market corrected from the 9500 area- that was correct, but what hasn't proven itself is the test of the 40 area on the VIX which, I believed, would have the DJIA higher than 9500 since the VIX at 50 equated to 9500 on the DJIA, so you would think a break into the 40 area would equate with a higher price than 9500. Well, the VIX is now at 40 but the market is well below 9500, it right now sits at dismal 8599, and well short of the 10500 target with a VIX at 40. With the VIX now at the 40 support it now seems like 25-35 area on the VIX would be needed in order for the DJIA target of 10500 to be achieved.

Looking forward, the VIX has still not hit its large support area around 25-35(congestion area), although a bounce on the 200EMA is currently in progress, and knowing the 50EMA is reading 50.40 on overhead resistance, the current bounce should have resistance there and come back down toward the ever so slight drag to the 25-35 area - maybe this can finally get the market back to 10500. What is concerning is that the DJIA hasn't moved far for a 50% correction in the VIX. Can the 25-35 area be the true test the VIX needs to be at before we see any sort of a sustained bull run in the DJIA - or is the VIX going to fade into the distance for the mean time while other patterns/indicators become more prevalent.

Assessing Breadth.

For many technicians, breadth indicators are key in confirming new uptrends or downtrends. If we look at the New Highs(end of day) to New Lows(eod) for the markets - this is nothing more the stocks making new highs(or lows) vs. the reciprocate - we can see favorable developments that confirma the market bottom is in. For instance, in the Nasdaq chart, we saw 1,600 new lows develop in October, but only saw 1100 new lows develop in November even as the market made new lows - stocks making new lows decreased from the October plunge to the November low. The same holds true for the NYSE which saw a positive divergence from the October plunge to the final low in November - 2400 to 1000 respectively.

The question now is what kind of reciprocate numbers can we see on the upside. How many new highs will be made on a market rally? Only time will tell, but there will be clues, you just have to quantify them.

Was the market bottom on friday?

I last updated a chart of the DJIA related to the VIX and the targets were hit - 9500 on the DJIA and the 50 support on the VIX. From there we saw some more volatility to the downside, but things have shifted once again. Look at the stochastic bouncing on the topside of the downward trendline from before. The VIX ROC is falling and the stochastic is crossing its %D negatively. And if we look at the ADX, the attempt at a breakout has not been confirmed with the ADX which made a lower divergence. Also, look at the volume - it is entering a new phase and produced one of the most powerful volume days yet! As for the bottom? - Only time can tell now.

Why the market bounce is for real!

After a violent and destructive thrust through the overhead resistance/ceiling of what "normal" used to mean on the VIX, The CBOE Volatility Index® (VIX®), we may now see momentum waning and a corrective course taking place. Look at the stochastic pulling a negative divergence on the recent high, the ROC(Rate Of Change) Indicator is falling and the ADX(trending indicator) looks like it has peaked - all for the meantime.

Lets look at the 50 as a short-term support and a possible intermediate trend downward back to the 35-40 area. The bigger question then remains if the VIX has now entered a new "era" where we will gauge market sentiment in between 30's and 80's, which would also mean more volatility. If this new era of the VIX does hold, then it will be a traders market with mini bulls, something that would resemble a channeling market. Or is this the ever so slow bleeding of the VIX back down to the 10 area? I guess you'd have to stick around for that one because its a long way off from here, but possible.

Let's now concentrate on the VIX short-term support zone(50's) and near-term zone of (35-40). This could act as correlation zones with the DJIA overhead resistances. I would equate the test of the 50 support area on the VIX with the DJIA 9500 overhead resistance. The 40 support area of VIX would correlate with the DJIA overhead resistance of 10500 - thats where the VIX broke the overhead resistance in late Sept/early Oct and the market crashed - yes, that was a crash.

Inflation and Deflation(Commodites vs Semis).

My assumption still stands: Semi's will outperform over near term and long term. Below is a chart comparing the Dow Jones-AIG Commodity Index (DJI) vs. PHLX SEMICONDUCTOR SECTOR INDEX (SOXX).

Notice the difference over the last 5 years: inflation was beneficial to commodities, while it hindered any sort of bull market for semiconductors. We have seen commodites prices ease(deflate) these last couple of months, and that means we are deflationary and Semis will counter - the next cyclical turn will have semis leading as deflation sticks around and commodities consolidate in its secular trend. This does not mean commodities will completely lag, but rather Semis should outperform in the cyclical trend, while underperforming on the secular trend.

You can view the full analysis blog called "The other Commodity" here.

http://polluxtechnicals.blogspot.com/2008/05/other-commodity.html

A short term triangle has formed on MU with good volume. Trade the bounces while keeping a long term position on hand.

The AIG triangle and Gap Fill

Target 10.00.

Stop-Loss 2.50

Risk with stop loss = - 40%

Profit Possibilities = +100%