I dusted off the ol' TA bible and imbibed some of the wisdom of Edwards & Magee regarding wedges:
In a rising wedge, on the other hand, there is no evident barrier of supply to be vaulted, but rather, a gradual petering out of investment interest. Prices advance, but each new wave is feebler than the last. Finally, demand fails entirely and the trend reverses. Thus a rising wedge typifies a situation which is growing progressively weaker in the technical sense.
It can develop either as a sort of topping out pattern on a previously existing uptrend, or start to form right at the bottom of a preceding downtrend. It takes more than 3 weeks to complete. Prices almost always fluctuate within the wedge's confines for at least 2 thirds of the distance from the base to the apex; in many cases, they rise clear to the apex, and in some, they actually go a short distance beyond, pushing on out at the top in a last gasp before collapsing.
The remains of wedges litter bear markets everywhere and this one is no different. I look at any major index and I see a wedge almost completed. For example, the DJ Transports, the DJ Ind, New York Composite, OEX, SPX, NDX, even European indices like the CAC, Milan, and the DAX. Now look at the bond market, they have wedges too!! And a huge red light should be flashing when they gapped out of them today.
What we are witnessing right now, IMHO, is the 'last gasp' that E&M talk about.
There are several reasons why I hold that opinion. I'll mention a few of them. Today the II released its sentiment data and it was fantastic (for bears). There are 2.3 X bulls as bears. This level of bullishness accompanies tops, not bases of rallies.
This also dovetails nicely into what E&M say about wedges. Namely that the buying is becoming exhausted. When almost 56% are bullish (and I assume long) who is left to push the market up?
Second, the VIX MA differential that I mentioned in another thread has now turned the corner and is headed down (sort of a U turn). Resistance levels are ready to smack down the valiant bear rally (SPX 940, OEX 480, etc.). And finally, volume, the fuel of all true and lasting rallies, just isn't there. Look if you don't believe me.
And finally, insider buying, just isn't there. Sure there's insider
activity. The insiders are dumping their shares hand over fist into this rally. Now you either believe that they are dumb and don't know a turn around or that they know something you don't.
Can I get a little specific? I've already mentioned my bearish stance on the transports. Now look at the following members of that sector: BNI ALK ACAI HTLD. They have graphs that look very similar (they did at close yesterday, at least). What I mean is that they share the following:
1]big recent rally
2]low or falling volume (no real fuel)
3]resistance (or pause for a few days)
That sort of set up linked with the BP% of the transports creates a really neat-o setup with low risk entry (gotta pay homage to Tony Oz -- he calls these sort of plays 'sky scrapers'). BNI still hasn't broken down but the others have. Oh and also, before you remind me, no sooner do I mention RYAAY as a low RS in the sector and a potential short than it rallies (today). Call it the luck of the Irish!
Of course, when the market cracks, you'll probably hear that its just a "correction" of the rally. Then when the bear roars again they'll say it was the Fed or CSCO's report or SARS or some other idiotic reason.
But you and I'll know the real reason. And I dare say ol' E&M will have a good long chuckle up there and almost drop their harps.
