Wednesday, May 25, 2011

Stock Market Analysis - Part 2

What a huge difference a few days can make.

On Thursday, when Market Barometer was analyzed, we were seeing a very bullish tilt. This was primarily because we were in a long-term uptrend with near-term market action being neutral. This combination led to a situation, where buying the dips made sense near the low indicated by the Inflection Point Model. At the same time, we had certain sentiment readings which were also pessimistic. Collectively, it was a good buying opportunity.

However, over the past two days market has declined sharply. Invalidating the ending diagonal pattern and bringing the bearish pattern to the top of the list. This decline has also led to the fulfillment of the proprietary 8/4 rule, converting me into a seller of rallies from a buyer of dips. As a further testament to the strength of this decline, unlike the last 5 bottoms which occurred during the "Turn Window," predicted by the Inflection Point Model, this decline did not stop there. Further, the pessimism which was cropping up in the market, has suddenly disappeared.  This suggests the recent decline has further to go. Hence, until unless we can solidly close above 1340, I will not be going long this market till the end of June.

Over the next few weeks, I will share my trade algorithm to better understand the risk-reward ratios involved in trading.

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