Tuesday, February 3, 2009

Triangles

The S&P 500 continued yesterday’s intra-day reversal ending the day up 13 points or 1.58%. Of the major sectors I follow, the Homebuilders (XHB) performed like a champ, finishing up almost 8% for the day. However, all it takes is one look at the homebuilders chart to know that it’s gonna take a lot more than one 8% up day to get me bullish on homebuilders. Technology, which has outperformed the S&P 500 over the last month, continued to exhibit relative strength (see comparison chart below).

The Financials were the only major sector that finished lower on the day (what’s new?). It will no doubt be tough to have a broad based sustainable market up turn without any participation from the financial sector.




After having formed a lower pivot high last Wednesday and more recently (yesterday) forming a higher pivot low, the S&P 500 is still in the midst of a 3 month long symmetrical triangle. A symmetrical triangle is a continuation pattern that is comprised of lower pivot highs and higher pivot lows. Upon reaching the apex of the triangle, the stock normally breaks out one way or the other. Given that the S&P is in the midst of a downtrend, we would assume that the triangle breaks to the downside.


The 800 level (8000 for the Dow) has recently served as a significant source of support. A break below that level could serve as a confirmation of the breakdown and a potential sign of more downside to come. I wouldn’t be surprised to see this rally lose steam as it approaches the upper trend line of the triangle (if it even gets that far). When/if that occurs I’ll be mighty tempted to start entering OTM bear call spreads or other bearish trades.








Tyler-