Is it a Correction or Start of a New Trend?

Sometimes it is difficult to determine if the market is simply correcting or starting a new trend.

I think that as a general rule, the market is establishing a downtrend near points of resistance on a longer term chart, and establishing an uptrend near points of support. In the chart above, we are more likely to be near resistance, so the 62% move in all likelyhood is a correction in a downtrend, rather than the start of or continuation of an uptrend. You do not have to short at the top of the 62% correction, but can wait until the market confirms the downtrend when the 20 period EMA crosses the 38 period EMA (green to red). At this point, there is still plenty of profit potential to be made.




Another confirmation that the market is losing upward momentum is to look at the 15 stock Sector Stochastic discussed in previous posts (note in the chart above that I am using a 6.5 hour stochastic rather than the 2 hour version). As you can see, the futures was much more bullish than the cash market. The Stochastic was barely higher than yesterday's high, while the futures was much higher. In this case, the futures is likely to correct back to the previous high, which is what happened.

Charles