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The Galaxy is falling apart: The roller coaster effect on market tops

March 16th, 2006 at 06:37 pm

Yesterday's action and my second prediction:

Yesterday marks a day that was probably the beginning for what I dub the "roller coaster effect": The major indexes did not exhibit much upward/downward action, taking place after a number of up days. Because of this, I think the market will probably start moving sideways to lower for about a week or two or so. Will this be a mild decline or something worse? not sure yet.


You are probably asking: what in the world is the "the roller-coaster effect"?

Here is the best way to describe it: As a kid, I liked to ride roller coasters. (Space mountain, Colossus, & the Beaumont roller coasters were all practically in my backyard). The ride would usually chug along from the bottom, starting somewhat quickly and then as the top approaches, it slows to a crawl, almost seeming to stop, suspended for a moment, as if stalling. Then the descent begins. A childhood friend of mine used to joke that he felt like the Galaxy was falling apart when the ride was getting just past the top.

An easy way to spot the roller coaster effect on a chart (use high/low close mode) is to look at the short term peaks themselves. Pick one and look at it and the preceding days. What you will probably see in most cases are 1 or more trading days that did not show much upward action (It doesn’t matter what the volume was). What's interesting here is that the first or second stalling day in the ascent (or groups of them) are usually not far its nearby top (may even be the top itself).


Tip of the day:

Does the roller coaster effect by itself spell long range trouble for the market? Usually not. The roller coaster effect may be signaling a decline of about 1-5% in the major indexes. If you are a an active trader and you own a no load mutual fund with free exchange privileges, it may be a good strategy to sell on the roller coaster effect and then buy back at the 50 day moving average. However, I do not recommend doing this during the beginning phase of a new bull market (first leg up or a really strong second advance) that is only a few months or so old.

Side note from a parallel universe:

The NASDAQ took on another distribution day yesterday to mark 3 of them for the last 4 weeks. The s&p 500 remains at 2 as its retreat was not that great and it still closed in positive territory. The counts arent bad but what the leaders have done lately is still a nagging issue.

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