by David G. Hawkins

In my last post here two weeks ago, I said, “Fasten your seat belts, we’re in for a rough ride ahead!”  And what a ride it has been!!  I also said, “As volatility increases next week, I expect that we’ll see more turning points emerge, most likely at these curve levels already established here.”  And this has happened in a very dramatic way.

The chart here is the weekly bars chart updated through the end of last week.  Compared to the same chart in my last post, for simplicity and clarity, I have removed all of the curves and levels that price blew right through, keeping only the red curve that showed at the bottom of that chart, and I have expanded the timescale back to mid 2009.  That red curve is what I had much earlier called Old R4, and I’m restoring that label here.  It’s been on this chart for a long time.  It is the 4th and last resistance curve in the hierarchy of resistance curves that followed the market crash from its top in 2007 down to its March 2009 low.  It is launched from the early Jan. 2009 pull-up in price, the last pullback in that long downtrend.  What an incredible performance that curve has put in!  In April of ‘09, price broke strongly above it, then later sank back down towards it, which means the curve became a support curve.  In the huge bull market that started in March of ‘09, prior to last week, price made two major pullbacks, one in July of ‘09 and the other in July of ‘10.  Old R4 perfectly captured – supported – price at both of those.  And now it looks like it is doing it again.  Last week, price shot down, hit the curve (within 0.3%), and bounced up, closing far above the curve.

In addition to bouncing off Old R4, last week’s price bar (candle) is remarkable in another way.  It is what Wyckoff called a Spring, a very long whisker sticking down after a significant down trend, but opening and closing near its top.  A Wyckoff Spring is interpreted as an indicator that price has bottomed out, and will next “spring” up.  In Japanese candlestick theory, last week’s candle is a Hammer, as in “hammering out a bottom”.

So, am I predicting that we’re about to go into a new uptrend?  No! Technical analysis in general, and Midas in particular, does not predict what the market will do.  Rather, it illustrates what the market is doing, so you may position your trading appropriately.  Here, it’s telling us that price has bounced up from major support, which is consistent with starting a new uptrend.  But equally importantly, it is telling us that, since this support is so strong, if price goes on to break below it, that’s a very strong indication of a major down move to follow.

So, how should one position one’s trading?  I don’t give trading advice (see my disclaimer here), but I will tell you how I’m positioning mine in a way that is consistent with what Midas is telling me.  I have chosen several stocks which I like for various reasons, both fundamental and technical, and have entered buy-stop orders just above close-in resistance on their daily bars charts.  So, if the market does continue to move up, I’ll be stopped in.  But if the market does not go up, I won’t be in.  Furthermore, I have put in a buy-stop order on SDS, the 2x negative beta S&P 500 etf, with the price trigger just below Old R4.  So, if the market breaks below Old R4, I’m short the market for the expected major down move.  This, IMHO, is the right way to use Midas.

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