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Wednesday, September 16, 2009

Is the $RUT Leading the Way, or Giving a False Signal?

Much has been made of the bearish rising wedges that have formed on charts of the major indices, and the pattern does indeed break to the downside more often than not. Add to that fact an overbought market, months of a denied pullback of any significance, and a time of year historically associated with market weakness, and there would seem to be the makings of a "perfect storm."

Time and again in the rally off the March low, bearish patterns have ignored the play book quite consistently, with tantalizing head and shoulders patterns taking shape only to leap defiantly out of their right shoulders and head on to new highs. On the rare occasions that rising wedges do break out to the upside, it is considered to be a very bullish sign. On Tuesday, the Russell 2000 closed a hair above the upper trend line of its wedge. Often when one index takes the lead the others soon follow suit, but we have come very far, very fast. The Dow and $SPX have not quite reached their upper trend lines, but are extremely close to doing so.

It will be interesting to watch how and where they close on Wednesday. There are still many bullish charts across a wide range of sectors, and recent action has been undeniably resilient and bullish. It has been challenging to reconcile the "logic" of an imminent correction with the action taking place on the screens. I am cautious up here, but the trend remains very much intact so far.

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