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An Ominous Chart for Bullish Traders

By Jeff Clark
Thursday, May 7, 2009

Beware the bearish rising wedge.
 
Indeed, no other chart looks so bullish yet carries so much risk. A bearish rising wedge forms when a stock makes a series of higher highs and higher lows, and the distance between the highs and lows grows more and more narrow.
 
For example, here's a chart of a D.R. Horton (DHI) I showed my S&A Short Report readers last week...
 
 
You can see the beautiful stair-step pattern coming out of the March lows. Anyone buying this stock at any point along the rising support line had to be happy as DHI continued higher.
 
That's the danger of this pattern. The upside momentum lulls investors into a sense of complacency. After all, what could possibly go wrong? The stock keeps moving up.
 
But the pattern is restricting – meaning there's less and less buying pressure as the stock moves higher. The resistance and support lines are coming together, signaling a big move is in store for the stock.
 
Most of the time, that move is lower.
 
Here's how the chart looks today...
 
 
DHI dropped 12% yesterday, even as the overall market raced higher.
 
It's difficult to tell exactly when a stock will peak inside this pattern. Once it does, though, the decline is swift and severe... and most investors can't get out of the way fast enough.
 
That is what has me most concerned about the overall stock market. I've been bearish for the past two weeks. And I've pretty much been wrong. So far.
 
With every passing day, the market keeps moving higher. So I spend my time washing the egg off of my face and scouring the charts looking for some reason – any reason – to change my view and join the bullish party.
 
But this is all I see...
 
 
The S&P 500 is in a classic bearish rising-wedge pattern, and it's approaching strong resistance at 925.
 
As I said before, it's hard to tell how high the chart will move inside the pattern. But once the peak is in, stocks are headed for a swift and severe decline. By the look of everything I've shown you during the past two weeks, the drop will happen sooner rather than later.
 
Be ready for it.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Crude oil hits a five-month high... climbs toward $56 a barrel.
 
Major commodity producers Massey Energy (coal), Freeport-McMoRan (copper), BHP Billiton (metals), and Teck Resources (zinc) make three-month highs.
 
World markets soaring... Australia, Canada, Sweden, Hong Kong, Belgium, Singapore, Mexico, and Brazil ETFs all at three-month highs.
 
Earnings today... AIG, CombinatoRx, General Motors, Pioneer Drilling, Sotheby's, Winthrop Realty Trust.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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