It is interesting to note that during the recent sell-off prices did not take out the very strong and long P&F trend line. We won't go into the niceties of P&F charting except to say that trend lines have the same import as bar chart trend lines. In fact it might be said they are marginally more powerful because of the P&F chart's filtering of noise.
http://schrts.co/HqBMEUAb
In fact, the chart is an excellent presentation of the context of the markets and shows price bouncing off the long term trend line. The subsequent price recovery is also well-illustrated by the columns of Xs. The explosive nature of the recovery is shown by the candlestick chart. Just as the volatility of this period was breathtaking, the pace of the recovery has been blinding. In 17 trading days, price has traversed approximately 325 points (basis SPX).
The INDU reveals even more about the market. The short-term trend has accelerated almost out of control and become quite steep, as shown by the line intersecting the prices.
We would expect a reaction here, but, in fact, Friday's action showed a buy signal, including a minor gap. Ordinarily, we would have reentered where the downtrend line was broken. But we remained on the sidelines deeply distrustful.
We are still distrustful, but eventually you have to do what the chart dictates. And right now it is dictating that long is the way to be. We are guided by our principle that if the market turns on us we can always exit.
So, next week, we will begin scaling in to the market if conditions remain stable. We will stop the position 1% under the day three days preceding Friday. This is a trade stop, not a trend stop.
W.H.C. Bassetti
Edwards-Magee.com
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