Daily Chart Developments

We have now reached TD Setup bar #9 on the daily (see attached chart). It is a perfected ‘buy’ setup. Remember that after a perfected setup has occurred the market ‘usually’ experiences a trend reversal, correction, or consolidation within four price bars of bar #9. If one were to buy the daily chart it would be in anticipation of a reversal. The system advocated here does not look to trade corrections or consolidations. We have to figure out whether a reversal is likely. To start ... Does the next higher time frame support buying this market?

As you know the weekly chart recently completed a perfected sell setup which did not lead to a trade. This means that the weekly does support a possible buy here on the daily. The weekly seems to be telling us that we may be getting a reversal on the daily chart and we need to look more closely.

Momentum (as measured by the RSI; top pane) is imparting two bits of information. The first is that the trend is down. This is seen by the fact that the RSI has fallen below 38. This does not happen in bull markets and is the reason for the two horizontal blue lines on the RSI chart. These two lines indicate bull market support. Next, note that the RSI made a new low the other day while the Composite Index (second pane) did not. This is an indication that at least a correction or consolidation is in the offing - but it will be within the context of a downtrend. But what if what we are seeing is the end of the downtrend on the daily chart? That is, the daily chart has been in a downtrend since January 19 and the trend indicator (orange lines) have shown that this is a downtrend. So perhaps this downtrend is now ending? To answer that question we turn to the REI (third pane). It is not below .45 and so will not let us make a trade here. In fact, it recently was below .45 for six periods. This indicates that an oversold bounce is in the cards and not a trend reversal.

Bottom Line: Any move up here on the daily chart is likely just a correction or consolidation.