Pescod Talks Wavefront Energy

Is A Change In Trend Approaching?

Is A Change In Trend Approaching?

By David Grandey
All About Trends

We've had a nice 6-week rally that has seen many stocks make significant short-term moves. And while we've been impressed with the market's resistance toward pulling back with any kind of meaningful significance, we're starting to notice some things that we haven't seen in the past 6 weeks.

First and foremost, the Dow completed a double top Friday. A double top is often an early warning sign that a change in trend is near - in this case from up to down.

For those of you that have been following this column for a while, you can see that the chart of the Dow below is a classic All About Trends short-sell set-up. The red lines show the double top. The green line is the upward trend line. If this were a stock, it would be on our short-sell watch list and we'd be going short when the Dow breaks the green upward trend line to the downside.


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Secondly, there are a lot of stocks that are extremely short-term overbought and extended - many of them are 30-40% extended from their 50-day moving averages. We've spent the better part of the weekend looking at lots of charts and we really only have one stock that we'd consider taking a long position in. So even if you want to be long here, the market is telling us to sit tight and wait for stocks to set- up again.

And finally, we've noticed a lot of stocks closed in the lower half of their trading ranges Friday. This is what market technicians call churning. Yes, the indexes were up, but when you look under the surface, many stocks had a tough time holding onto their gains Friday. What this means is that the "smart money" was selling into the rally.

With all of this said, the percentages favor a pullback. I know we've been talking about this for a while, but the amount of evidence is piling up on that side of the fence now.

However, we don't see a lot of good short-sell set-ups out there yet. This doesn't necessarily mean we shouldn't be looking to go short. It's more of how many stocks are so overextended that they need some time to start forming set-ups. Take a look at the charts of NTES and GMCR - two stocks that are leading the market higher.


They have done nothing but go straight up - we want to see some structure form them first - such as a double top where we have a clear area of resistance to give us a point to trade. For example, is GMCR going to keep going up when it is 12 points extended from its 50-day? Probably not, but if it does, where would it stop? The chart isn't giving us the answer either. Now scroll up for a look at the Dow chart - here we have a double top-- which tells us that the Dow is likely to stop advancing at that level.

Sincerely,

David Grandey