Climactic Readings Usually Signal Exhaustion

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(This is an excerpt from recent blogs for Decision Point subscribers.)

We often refer to very high indicator readings as being climactic. This is particularly true with ultra-short-term (days) indicators such as the Participation Index, which measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope. High DOWN Participation readings this week probably mean that current selling pressures are exhausted in the very short-term.

On the chart below we can see that readings of +60 and greater (UP or DOWN Participation) are generally speaking extreme or climactic. And in most cases climactic readings coincide with the exhaustion of the price move that generated the climactic reading. Sometimes prices consolidate briefly before continuing in the direction of the climax, or the trend reverses, retracing all or part of the previous price move.

Screen shot 2012-11-09 at 2.11.06 PM

On Thursday we had a DOWN Participation of +69, so we should be expecting that selling pressure in the ultra-short-term time frame is close to exhaustion. Friday's miniscule bounce and the contraction of DOWN Participation implies that we can now expect a short consolidation or slight advance before prices head lower.

Obviously, it is possible that we will see even more extreme DOWN Participation readings next week (driven by much lower prices), but for now let's assume that the market will take a brief "pause to refresh".

Technical analysis is a windsock, not a crystal ball.

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About Carl Swenlin