Beware The Volatile V "Bottom"

November 10, 2014

When you read the word “bottom” in a chart pattern’s name, you probably assume the pattern will carry a given marketplace higher for a sustained period of time. What you may not think about is a pattern that delivers a deceiving move up to the top of a highly volatile sideways range where resistance typically pushes the marketplace right back down. 

​But this is precisely the pattern to carry stocks higher to new all-time highs in recent weeks and it is precisely the pattern to carry stocks higher in the early summer of 2011 before the entire sideways trend produced a severe reaction to the downside as is shown well by a daily chart of the Dow Transports below.

stocks highs

When we turn to the Dow Transports today, its daily chart consists of: (1) an uptrend breach on, (2) the volatility of a sideways trend, and, (3) not one but two V “Bottoms” with the first preceding the September pullback that turned violent by mid-October.

2011 bottom

Today’s technical set-up does not look exactly the one in 2011, but it is comprised of those three key bearish elements that speak to a shift in control to the sellers from the buyers, and thus is probably similar enough to think it may produce an equally bearish reaction.

Supporting this possibility is the divergence of monthly higher highs paired with monthly lower lows and something that indicate increasing euphoria and fear with each swing up and down. This sort of highly emotional and out-of-control market speaks to a tense battle between the buyers and the sellers, but it is the breached uptrend that strongly suggests the sellers will win this scuffle for control.

This translates into a bearish Broadening Formation and Rising Wedge pattern combination that is likely to produce a minimum of a 20% correction to the downside with the recent V Bottoms pointing to the idea that this bearish event may be near.​​

It is worth thinking about that V “Bottom” and those new all-time highs and the reaction to come out of that volatile sideways trend now since the equity indices are caught in a similar technical scenario today. 

​To see this, let’s look first at the bearish technical set-up in 2011 comprised of: (1) an uptrend breach on, (2) the volatility of a sideways trend, and, (3) a V “Bottom” that took the Transports to new all-time highs.

​​It may be wise, then, to beware the volatile V “Bottom” with history suggesting it may signal bearish activity is ahead.

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Courtesy of http://www.peaktheories.com

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