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In this example I will show you how you could
have nailed the recent top in the Russell 2000 Index.
Chart 1
Before we look at the current time frame,
it is important to go back to the last Quarterly Chart low on 7/21/2006. As noted in the above chart, the Q Chart turned
down on 7/21/06
by breaking the June low by a small amount. As a result, the Q Chart
made low on the same day it turned down, very bullish behavior. Please
note that the Quarterly boxes are in Red and the Monthly boxes are in
blue. In addition the Monthly Swing Chart completed
a down inside month in August, another bullish setup. As we know from
the tables in my CMT paper included on this site, a down inside month
has a very high probability of turning up. As you can see in the chart
above, the Monthly turned up in September, completing a potential bottom
formation. This setup was completed in early October when the key Quarterly
Chart turned up, confirming a higher low on this important chart.
Even if you waited to go long until the Q Chart turned up, at
738.17 in Early October, the gain to last months high of 858.46 was
16%. The real buy was when the weekly chart completed a higher low in
late August. The swing charts on the Russell continued to
act bullish for the next 11 months. It is also important to note that
the Russell made a primary low in June 2006 and the new low 23 trading
days later was a small undercut of that low.
This observation will be important to refer to as we get into
June and July 2007.
Chart 2
In Chart 2 above I show how the recent
top was a fractal of the low in June and July 2006. The June high was
tested with a slightly higher high on July 13th. The separation
between these two highs was 23 trading days. .It is important to realize
that the market is not a Swiss watch so you can not expect perfection.
In this case we can say that as below, so above with patterns that are
almost perfectly opposite. In the next Chart I will discuss the “Get Out
of Dodge” sell signal on this index and how you could have use the swing
charts to get on board the short side and sell long positions early
in the decline. It is also important to note in chart 2 that 360 degrees
in time was completed on July 20th with the first of several
Reif Distribution Days starting on 7/20/2007.
Chart 3
In Chart number 3 we can see the setup
develop from 6/12/2007. In this case, the rally in
early July began from a base of “two feet planted” on June 12th and
27th. The new high on 7/13 SHOULD have let to higher prices
immediately. As we can see, the high day on 7/13 was an NR 7, the narrowest
range in 7 trading days. This was a big warning that the breakout was
a potential bull trap. In addition, the fact that the new all time highs
in the DJIA and S&P while the Russell was underperforming was another
warning. Note that the daily swing chart turned down with a wider range
the day after the high. The price continued down to touch the 50 day
MA on 7/18 which setup a one day bounce. The clincher was on 7/20/07,
when the price declined and closed below the 50 MA with a RDD. At this
point it was important to look at the Monthly and Quarterly Swing Chart
positions. After the close on 7/20, you note that the monthly
chart would turn down by penetration the June low of 819.75. If this occurred, you would have an outside
down two plot month, a very bearish event from a new 12 month high.
If this monthly chart turns down it would setup the expectation of a
turn down in the Quarterly Chart due to the Principle of Fractals. We
now have the potential setup of the "Get Out of Dodge" signal. This signal is defined as a turn down in the
Quarterly Swing Chart in the area of the 200 day moving average. If this signal is triggered the market could
be trouble for the next several months since it completed an outside
down two plot quarter. As you
can see the turn down in the Q Chart occurred on the same day as the
close below the 200 MA. Once the Q Chart turns down it is important
to begin the time count from the 7/13 high and the Principle of Squares
set on that high. This will be shown in Chart 4 below.
Chart
4
In the above chart we have set the Principle
of Squares on the 7/13 price high of 856.46. We note that 270 degrees
down in price is 770.91, a place where we should expect a bounce to
begin. Amazingly, the low on 7/30 was 770.59 from which a 3 % rally
occurred into the high of 7/31. As I write this on 8/1/07, the price is trying to hold the 270 degree angle
down from the high. If this level does not hold we should expect a test
of the March lows which is near the down 315 degree angle or the 360
degree angle at 743.40 the most likely first big target to the downside.
If a rally begins here, the target should be up to the area of the “Two
Feet Planted” which will now provide considerable resistance. A rally
to this level along with a touch of the now declining 50Ma would be
a classic “Graceful Exit”. The key to future price action is to observe
the behavior of the weekly swing chart once it turns up. If you were
to get a -1, plus 2 on the weekly 3 bar chart it should prove to be
an excellent place to exit losing long positions. I want to make it clear that the GOOD (Get Out
of Dodge) signal works on ANY stock, index or commodity.
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