Breakpoint Trades - Newsletter

The least risky approach for investors is to wait for this consolidation to resolve before making any large bets either bullish or bearish. The market could break out of this pattern and run to new highs this summer, or the downtrend could resume itself and thus complete a bearish descending triangle pattern that would likely result in a drop to the 1600's for the Nasdaq.

Again, this week will likely be an important week.

The 60 minute time frame shows us that the Nasdaq is bouncing off the uptrend line and stochastics are giving a buy signal.

However, when you zoom in even further to the 10 minute chart, you can see that the Nasdaq has clear resistance at 2005. If 2005 can be broken then the Nasdaq my begin a strong rally.

Zooming out further shows a potentially bullish technical situation for the Nasdaq via the bullish flag pattern. A breakout to the upside of this flag, could result in the Nasdaq rallying to 2300 over the summer. However, note that this flag can easily be redrawn as a bearish descending triangle. In other words, the Nasdaq is currently at a pivotal 'breakpoint' and will either begin a large rally or enter a stronger correction.

Some of you have probably seen the recent posts discussing Elliot Wave and the market. First off, I must disclose that I am not an expert in Elliot Wave analysis and I only know the basics.

Anyway, Nasdaq sure looks like it is following a bullish 5 wave Elliot Wave pattern. The Nasdaq looks like it is about to embark on wave 4, and a breakout from the recent bullish flag consolidation on good volume would likely begin wave 5 of this pattern. This is important to note because wave 5 would be at least as long as wave 1 and probably longer. Therefore, wave 5 would likely take the Nasdaq to 2200-2300 at least. Note how this also correlates very well with the above chart where resistance is shown at 2300. Another thing to note is that wave 4 also looks like an ABC correction, which would also support this view.

To view a larger chart, click on the blue like below:

Nasdaq Elliot - bigger graph

The DOW looks similar to the Nasdaq, with major resistance at the downtrend line. Once again, notice the lack of volume on this recent leg up and the converging 50 and 200 MA's. The DOW is at a 'breakpoint' similar to the Nasdaq and is on the verge of beginning a new bullish or bearish trend.

Zooming all the way to the 10 minute chart shows that the DOW is consolidating into a tight range with resistance at 10435. Once again, I suspect the Fed meeting on Tuesday about inflation will

The long term picture of the DOW is telling; major resistance is at the multi-year downtrend since 2000. Conceivably, the DOW could rally all the way to the downtrend line near 10650 and still be in a long term downtrend. Also note the bullish flag that has formed. Long term support exists at 9000, that would likely be tested if the market decides to begin a downtrend rather then breaking out to the upside - this question may be answered this week.

Here's an Elliot Wave chart of the DOW, notice how similar it is to the Nasdaq.

The S&P 500 also resembles the Nasdaq and DOW.

The 60 minute time frame shows us that the S&P 500 is bouncing off the uptrend line.

However, when you zoom in even further to the 10 minute chart, you can see that the S&P is trying to break resistance from the recent consolidation. This chart looks like there is more upside, at least in the short term, for the S&P 500.

The NYSE composite has also formed what appears to be a bullish flag with significant resistance at the downtrend line. The NYSE broke the flag last week, but is pulling back a little and trying to find support on the broken downtrend line. It's possible the NYSE finds support and rallies, however that will depend on what the rest of the indices do.

The Industrial Equipment sector also seems to have formed a bullish flag. This sector has also broken the flag to the upside and is pulling back where it may find support on the broken downtrend line.

Market Indicators:

The VIX has fallen to strong support marked in red and, just like the major market indices, the VIX is at a 'Breakpoint'. If the VIX breaks support, then the market will rally, however with the VIX already at such a low level, it's hard to envision it falling much further. Therefore, any market rally that would result from the VIX breaking support, would probably not last very long.

However, if the VIX rallies off this support area, then the market is 'TOAST'

Zooming into a closer look via the 60 minute chart, you can see that there is positive divergence via the MACD. This is bearish for the market as it shows that there is a strong possibility for the VIX to rally, which would of course, cause the market to crash.

In closing my commentary on the general market (Nasdaq, DOW Jones, and S&P 500) as well as other major indices such as the Semiconductors, the Industrials, and the NYSE, all have similar chart patters and are close to significant downtrend resistance lines just as they were last week.

Once again, the major market indices seem to be near 'Breakpoints', i.e. they are either on the verge of a major rally that could last well into the summer, or on the verge of a major downtrend. At this point, it's hard to say whether the bullish or the bearish scenario will play out, just make sure to keep an eye on those 'Breakpoints'.

Also, the VIX charts directly above need to be watched carefully: With the VIX already being very low, even if the market does breakout, I think the rally would end sometime in the summer. Also, via the 60 minute chart, the VIX looks like it could rally, which is very bearish for the market.

Many times, technical 'Breakpoints' are resolved with news, and Tuesday morning at 8:30, the Fed. reports the CPI, or consumer price index numbers, the consensus is for a 0.4% increase. This report will may be a major market mover: A CPI greater then 0.4% would spook the public into thinking that the Fed needs to raise interest rates faster and farther then previously thought and may spook the market. A CPI below 0.4 would show that inflation is still tame, and may be the catalyst that sets the stage for a strong market rally that breaks the resistance lines of the bullish flags to the upside.

Another significant economic report is new housing starts on Wednesday. The previous number was 1969K and this week the Fed is expected to report 1950K.

Let's take a look at a Foreign Markets via ETFs:

I have noticed that many foreign markets now look bullish, I wonder if this is a sign that the US Market will breakout to the upside as well. It's interesting to note how many foreign markets have also formed bullish flags that are very similar the US stock market. I suspect that whatever the US Market does, so will many of these foreign markets - it's a global economy and we're all connected.

As you can see, the Swedish Market has formed a bullish flag similar to the US Market indices.

Likewise, so has the German Market.

Likewise, so has the Spanish Market along with support at the 200 MA.