Bullish Descending Wedge Forms
by Carl Swenlin
December 5, 2008

In my November 7 article I featured an horizontal trading range (continuation pattern), and asserted that a breakdown from that pattern would signal another leg down. There was, in fact, a breakdown, but it was a bear trap, and prices quickly reversed upward back into the trading range.

Price action since has caused the chart pattern to morph into a descending wedge pattern, which is bullish and implies that an upside breakout would provide the start for a new up trend. I want to emphasize that, while an upside breakout is expected from the wedge, it only has short-term implications. Nevertheless, we do have a fair to good setup to get the ball rolling for a sustained rally.

There are, however, things not to like in the technical picture. First, volume has been weak, although, we can write that off to holiday trading volume, which is always low. The other problem is that important short-term indicators (shown below) are quite overbought. Note that the CVI and STVO are both at overbought levels that typically accompany price tops in a bear market. If prices are able to overcome this internal drag, it would be a very bullish sign. While bear market forces weigh heavily against this outcome, some bullish outcomes are inevitable. This may be one.

Bottom Line: We are deep into one of the worst bear markets in history, but bear market rallies are usual and to be expected. An upside breakout from the current descending wedge chart pattern may provide the trigger that starts a new rally; however, I do not believe that the November low will be the final low for the bear market.

We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.