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Dow Leaves a ‘Bull Trap’

Courtesy of Declan

Two days of selling has finally put a stop to the accelerated gains from December but it should also provide an opportunity to shake the weak hands out of their positions and set up a more sustainable rally.

The nascent breakout in the Dow has been undone by the fall back inside the prior channel, leaving in its wake a 'bull trap'. Shorts will use the 'bull trap' highs as a place for stops.  Typically, 'bull traps' from channel breakouts go all the way and drop out the other side – this would be a secondary shorting opportunity but we are not there yet.
 


The S&P made a clean break of the narrow channel from December returning to a slower channel support level (which was former channel resistance).  Technicals remain bullish so the channel break doesn't suggest any larger deterioration other than a slow down of the existing advance.
 


It was a similar story for the Nasdaq – a channel break – with the option of former channel resistance turned support to lean on if needed.
 


The Russell 2000 will have rewarded persistent shorts but the bearish wedge has yet to confirm – a break of wedge support will be needed for this.
 


The coming days will be about confirming the channel breakdowns, the 'bull trap', and potentially a break of the bearish wedge (in the Russell 2000).  The last two days are a start but there a long way from confirming a market top. Profit taking is always prudent after any period of sustained gains – helping to free up funds to buy (back) stocks at a discount.


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