Week Ended December 22nd

The markets finished the week before Christmas on a down note on friday. It doesn't surprise me that the indices sold off, though. Weakness in the MACDs of the three indices I follow (INDU, SPX, NDX) indicated that a selloff was imminent. In fact, regarding the INDU and SPX, triple-top divergent formations were being exhibited as prices reached three higher highs but MACDs posted lower highs, an indication that the strength of the rally was waning.

Above is a daily chart of the INDU. Notice how prices reached three higher highs, while the MACD line responded with three lower lows. The momentum of the recent move up has waned considerably, and either a prolonged consolidation is in store, or a correction of some magnitude will take place in short order.

My bet is that the markets will sell off sharply during the next few weeks. I feel strongly that INDU 12300 will be taken out. Depending upon the nature of the move through that price level, I think the index will then target the recent short-term lows around 12072 before finding some support. But I believe the strongest support lies around the October lows around 11965.

Above is a weekly view of the INDU. Notice how the recent triple-top divergence (the divergence between prices and MACD) seen in the daily chart is translated in the weekly view: the divergence is not as apparent in the weekly view. But, it is there nonetheless: the daily tells us so. In addition, notice that weekly MACD stall-out/divergence (again, although not as prevalant as is seen in the daily chart) occurs after a strong momentum move (MACD rose in concert with price until recent weakness developed). When comparing this chart characteristic with other examples, what I have found is that any selloff, once the price move reaches other technical areas (be they moving averages, support/resistance levels, bollinger bands) then a rather strong counter-trend move (a bounce higher, in the case of a selloff) ensues. So, using my price targets above, should the INDU reach the 11965 area, I would expect a rather sharp bounce to occur, perhaps retracing 50% to 62% or more of the down move from recent all-time highs around 12500. This is the character of the MACD pattern that has emerged in the weekly chart of INDU.

Thus, my best guess of where the markets may go is a move down to 11965-ish (about 535 points off the highs of around 12500), then bounce sharply about 260 - 330 points (50% and 62% of 535) higher before stalling out again between 12230 or 12300.