The Black Swan makes an appearance

The Black Swan appears and the sight of it frightens many investors. It should have been expected. It always appears at the end of a fifth wave. Why is everyone surprised. They should have seen it coming. After all, it appeared first in Greece, then in Tunisia, and now in Egypt. There will be more appearances in countries affected by the economic downturn. The mood is changing and this will have a dire effect on the markets. Monday should be interesting. It may confirm the market reversal and go down. It may contradict the soothsayers on CNBC who are maintaining that this is just a normal correction that always follows a run up in market prices. They maintain that we are still in a bull market and are advising viewers not to panic and sell their shares. Worse, they are telling the viewers that this is a good opportunity to add to their positions. But when social mood changes, the markets also change. A good strategy at this time is to be in cash, or, for the more risky investors, short the markets and enjoy the ride down. This will be better than sledding, skiing, or ice skating.

Nasdaq index reverses trend

The Q's appear to have reversed. This would not be surprising because the Q's have led the uptrend. It is only fitting that the Q's should lead the downtrend. The chart of Friday, Jan. 21, 2011 is posted. Relative strength has reversed. The 10 and 20 day moving averages have been pierced. MACD black line has crossed over the red line. Full stochastics black line has crossed over. All the indicators indicate a downtrend has started. However, The DOW and the S&P have not yet confirmed the downtrend. A patient trader will wait until all of the averages have reversed trend. A less patient trader would sell his positions and either go into cash, or, short the market. I am short the Nasdaq market. I will cautiously watch the indicators to see if this was a false start.

The end is near!

The big question is: how long can this uptrend last? There have already been more false starts than I can ever remember. But this is clear: we are one day closer to the reversal. Because the uptrend has lasted so long, the new trend will also last a long time. Because almost every one is bullish, the downtrend will not be believed and many will buy the dip. It will be an interesting and exciting ride. But the big question remains! When will this market turn down? Patience is desperately needed.

Signs of a reversal

click on the image to enlarge and check the signs for a reversal.

The completion of wave C has taken much longer than anticipated. However, Wave C has now almost completed 5 waves. When this happens we will see a huge reversal. What are the signs of the reversal? This is what I look for:

RS/Relative strenghth should be above 70. It is there now.

Waves: we should be in the 5th wave. We are there now.

Macd: the black line must cross the gray line. Not there yet!

Stochastics: the black line must cross the gray line. Not there yet!

Moving averages: I use the 10 day moving average and the 20 day average and the 50 day moving averages. When the 10 crosses the 20, it is a short term reversal. If the 20 crosses the 50 day average, it is an intermediate reversal.

When all signs point down, pull the trigger, make your move.

This is a chart of the QQQQ on January 7th which illustrates the above signs.