Wednesday, June 27, 2007

2b reversal

First off I will go over 1-2-3 reversals. Then I'll discuss the 2b variation. Victor Sperandeo describes a 1-2-3 reversal this way. Once a stock or index breaks the up or down trend line there will typically be a reaction move. That reaction move is deemed #1. Then you will normally see a test of the low, move #2. Sometimes this test is strong and reaches the full trend break low or high and sometimes it is weak hardly even worthy of being called a test. The confirmation comes at point 3 if the index can close above point #1 or if it breaks down and closes below the original trend break low or high. I know it sounds kind of complex but just take a look at the chart and it becomes clear. A 2b reversal is the test of the intial break except it actually does break that support only to reverse and close higher or lower as the case may be. This is a strong signal that selling or buying has dried up and the trend break can't be continued. Very often a 2b will signal the exact bottom or top of a move.

I must admit all the talk of a double top totally distracted me from seeing the 1-2-3 correction that was happening in the markets. I don't think the action has been a double top at all I think we just witnessed a very powerful #1 reaction to the intial decline. There was much talk about how quickly the intial break at the begining of June was overcome. The reality is that this little correction is taking the about the same time to recover as the Feb. 27th correction. Today we are getting a 2b reversal in the DOW, S&P, WLSH, NYA, UTIL & RUT. The Nasdaq has been much stronger and never even broke the uptrend line so no 2b there. None needed. The Nasdaq has been trying to tell us that the market is not breaking down yet