I just created this 3 line break chart of the Nasdaq summation index on Stockcharts and thought I’d share as it challenges my bullish outlook. It also incorporates some of what I’m learning from the book “Sentiment Indicators” that I started over the holiday weekend. So far it has been very enjoyable and informative on indicators that were previously unknown to me.
For those unfamiliar with 3 Line Break charts they take time out of the equation and you can purely look at whether a trend is beginning or coming to an end. One method to time how long a current rally has left is to look at the length of previous rallies and use that as a measuring tool for the current one. Using that information alone, we have matched the number of weeks from the feb-april rally with this current rally at 25 wks. After a short decline of 4 wks during the first rally, there were 5 more weeks of upside move before the big decline really set in.
One way to use the 3 line break chart for a reversal pattern is when a trend reversal bar occurs and it takes out the previous 3 bars either to the upside or the downside. That way there is sufficent strength behind the move and it has a higher percentage of actually working out.
I remember my market timing signal went bearish during the first week of may so that would coincide with the failed continuation move. I’ll be interested to see how this time of timing meshes with my current trend timing methods. It could act as a nice confirmation. Anyhow, feel free to share this chart with your network as I think it provides a certain level of caution on where we do stand with this current rally.
Another note here is that the RSI is at it’s previous high (grey arrows) which could be significant.
