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Rule of Three Failure

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Well, we were not able to sustain the break through resistance and the three closes above it to turn resistance into support. You can see on the graph above that we were able to close between the two support/resistance lines on the graph that we’ve discussed the past several blog posts. You can see how even when we dipped below the lower support line during the day (remember this is a two hour graph so there are four bars to each day) it retained its support characteristic and we were able to close above it.

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Here is a chart of the S&P 500 Index in a format that you’ve seen several times in the past. It’s annotated to make it easy to spot a couple of things.

The two purple circles point out short-term momentum indicators.

The one near the top shows that the over-bought condition on the 7-day Relative Strength has fallen below the indicator line, so it is no longer indicating a pull-back. Given that it is a 7-day indicator, it reacts quickly to changes in the market, like today’s sell-off.

The one further down on the graph is the 14-day Stochastics. It is showing a reading that is still above the indicator line saying that we are probably due for a bit more of a pull back. Since it is a 14 day indicator, it is slower to react to market movements like today’s sell-off.

Since these are giving conflicting signals, there is a no definitive indication. However, today was a news driven sell-off and they tend to bounce back the next day once that news is past – unless there are follow-on headlines. The thing in favor of a positive day tomorrow, maybe even an attack on the resistance level, is that we closed above the lows of the day with buying interest going into the close.

We do have to work off the over-bought reading on the Stochastics, but that can be done with a series of movements that equate to a sideways move – the market doesn’t have surrender to a major down draft as passage of time can work off the over-bought condition.


Click here to watch today\'s video on YouTube

Mark