By Christopher Diodato – TradersBase.com
Okay, I’m sorry for my arrogant title, but I was hoping to catch some interest. While Mike was taking care of the post to hold you over this morning, I was attempting to complete economics homework while subconsciously calculating ratios of the Dow Jones Industrials in my head.
Disclaimer, I’m about to use all the weirdest analysis methods I know, so my apologies in advance for any aneurysms caused by my charts.
I’m fairly certain I know where the market is going next, and I only have two scenarios. The first one is we have a final proportional decline and then we rise. The second is that the market goes into a “volatility expansion” and we have a larger selloff.
Before showing the analysis, watch this to get an idea of my logic.
Here’s the first. Click on it to enlarge.
This is the highest probability scenario, since it assumes that proportionality remains constant, which it most often does. Notice the zone where the channel support, both the pivot lines, and the blue angle line meet around the 12,350 level on July 17 between 1:30-2 PM. That’s the expected bottom. Then, we move up until about July 20 around 2:45-3 PM before reversing into a very sharp decline into late August. The target for the correction upwards is about 12,575 in the Dow. The downside target for afterwards is at least 11,536.
The second highest probability scenario is a volatility expansion, which could be triggered by, perhaps, terrible earnings by JP Morgan & Wells Fargo. Maybe large settlements across all financial stocks for “LIBORgate?” Anyway, that scenario says that the bottom will be July 20th around 12,150. Even though the second most probable, I don’t think it will come to fruition.
An invalidation of my scenarios would be an upward break of the downward price channel, or about a 2% market advance.
Here’s the video analysis. I’ll be covering my PCLN short next Tuesday with the intention of re-entering on the 20th.