Bearish Candlestick Patterns Warn of a Killer Third Wave Down Approaching

On June 15, 2009, the Dow Industrials marked an “outside-down” day which bearishly engulfed the “real bodies” of the nine preceding days’ price action.  I had never before seen a pattern such as this.  We took it to be a bearish warning of particular significance.  Since that time, through today, prices have developed two descending “one-two, down-up” patterns, the latter of which is still not complete, and would not be complete unless prices fall below 8259.60, which was the low on June 25.  When and if prices fall below that low, then we can be reasonably sure that prices will have embarked on a “third wave down,” which should mark the end of the bull rally that began on March 10 – and, therefore, that prices will be on their way to much lower levels.

Quite apart from the June 15 “outside-down day,” today’s price bar in the Dow Industrials shows us a bearish “Dark Cloud Cover” pattern, which is shown as a “Bearish Engulfing” pattern in the S&P 500 and also in the NASDAQ Composite.

Typically, a bull rally in an underlying bear market (which is the situation today) does not come to an end unless and until there is an aura of optimism and even euphoria which is reminiscent of that which obtained at or near the prior price peaks – in this case, early in year 2000 and again in September and October 2007.  We do not see any such degree of optimism now, which leads us to believe that the Great March Rally of 2009 is probably not yet over, and that we could yet see Dow prices in the 10000 range.

Nevertheless, we have no choice but to go with the evidence that we see, not the evidence that we think we should see or that we would like to see.  A highly-skilled practitioner of Elliott Wave aalysis wrote – decades ago – that “the hardest thing is to believe what you see.”

In this particular case, much as we would like to see evidence of a final rally price high which is attended by a high degree of optimism, it may in fact “be different this time.”

The key will be the low of June 25.  If that low should be exceeded on the downside, especially on a Closing basis, then the chances would be at least fair that a third wave of a third wave is in progress, the Rally would be history, and we could look to much lower prices ahead.

William Kurtz       June 30, 2009

The author is a retired corporate CEO and attorney, and a long-time investor. He has passed the NASD Series 65 Investment Adviser exam. He publishes his Investment Newsletter and Action Suggestions three times per week at the CandleWave website, http://www.candlewave.com/ The Action Suggestions provide specific Safety Stops on major Indexes; a review of the major Indexes; an individual review of each of the Gold, Silver, and Crude Oil markets; an individual review of each of the Dow 30 stocks and of selected non-Dow stocks; a review of five popular Forex pairs; and his Daily Commodities Report. The Daily Commodities Report is also available as a free-standing service at http://www.commoditiesjunction.com/ The Operating Manual for his copyrighted “Candelaabra” technical analysis trading system for all financial markets is also available through its own website at http://www.candelaabra.com / E-mail contact via info@candlewave.com/ “Candelaabra” rides atop Genesis Financial Technologies’ “Trade Navigator” © platform. “Trade Navigator” with the “Candelaabra” overlay, and data feed, are available directly from Genesis by arrangement with CandleWave, LLC in a joint 30-day trial of both Trade Navigator and Candelaabra.

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