A Hound of the Baskervilles Signal Today on the SP500 ?

So far the market correction is behaving similar to the 1975 correction and has been relatively ‘orderly’ and persistent but not of the nature of a ‘mini crash’.  That could still change, but at least up to this point it is on the track of being garden variety normal corrective action that was clearly over due since the July 2009 and March 2009 swing lows.

Friday’s reversal candle was significant in that it was a reversal hammer that typically should result in strong follow through to the upside.  That did not happen today and leaves the rebound rally in doubt.

Friday’s reversal candle was also a lower low on equally heavy volume as the previous day and leaves it wide open to be retested.  I suspect that could happen as early as this week.

Daily RSI (14), is signaling to me that it wants to bust below the key 30 level and do a little basing out under that level.  That is exactly what happened during the 1975 corrective leg and was the first signal that most of the damage was finished.

The behavior of this correction is very important because it will determine what probability exists for a solid base forming near the high 900’s level, or only a shorter term base that eventually fails and breaks down further towards the March 2009 lows area.

My preferred scenario is still that we form a solid base and do corrective basing action for several months which should eventually lead to a massive blast higher and resumption of the bull trend.

But of course that preferred scenario is subject to change at any time.  I need lots more data and price action to get a clearer picture.

The bear trend has characterized itself as being very persistent in terms of lower lows and lower highs and has not offered shorts many new chances to re load their short positions.

Incidentally the TYP triple bear Nasdaq ETF has a very bullish stance right now and I love the setup.  I went long the TYP today near the close after bailing out of the TZA after last Friday’s reversal hammer candle (because I thought it would lead to a big bounce).  But since the bounce never happened, we may have a ‘Hound of the Baskervilles’ signal which is a signal that Alexander Elder describes in his outstanding trading book Trading for a Living:

Elder says this signal occurs when a reliable pattern or an indicator does not lead to the expected action and the prices move in an opposite direction. Alexander Elder names this signal, as The Hound Of The Baskerville, based on a famous story written by Sir Arthur Conan Doyle. In the story detective Sherlock Holmes was called upon to solve a murder case in a country estate. He found the essential clue when he realized that the family dog did not bark while the murder was committed. This meant that the dog knew the murderer, and that this was an inside job. The signal was given by lack of expected action-by lack of barking.

So if the signal is valid then one of the next few days should be very hard down, not just down

Posted in SP500

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