|In 2007–08, the Malaysia iShares (EWM) formed a head & shoulders top with a neckline support at 10 level. The head & shoulders top is one of the major bearish reversal patterns, indicating long-term trend change. |
The marked rectangle for the stochRSI (14) in Figure 1 shows the same head & shoulders pattern as on the price chart. EWM entered a new downtrend with a bearish breakout of the head & shoulders pattern. The average directional movement index (ADX) (14) surged from the consolidation mood and entered the strong downtrend after the price breakout. The target of 61.5 (13.5 (highest peak) - 10 (neckline) = 3.5 - 10 = 6.5) was achieved by October 2008, but EWM moved down further, marking a new low at 6.
|Thereafter, the index consolidated, forming the higher lows and a stable high at the 7.5 level. This consolidation is likely to form an ascending triangle. The ADX (14) showed the well-developed downtrend, and therefore, the ascending triangle is seen as a reversal pattern. The bullish breakout of the triangle would bring a fresh rally. But in Figure 1, we can see that EWM has violated the lower trendline of the triangle. The pattern is bullish; the downside breakout was not anticipated and therefore, we need strong breakout confirmation signals. The ascending triangle has not yet matured for the upward breakout.|
|FIGURE 1: EWM, WEEKLY. The ascending triangle is being built. EWM has breached the lower trendline support of the triangle. The stochRSI (14) has slipped below the centerline.|
|Graphic provided by: StockCharts.com.|
|The stochRSI (14) has plunged below the centerline support at 0.5 levels, indicating a weak momentum and fresh selling signal. The declining ADX (14) from 50 levels is indicating an overheated downtrend at the current levels, but the trend indicator does not reflect any signs of trend reversal. The positive directional index (+DI) is declining as well, indicating low buying pressure, so the long-term downtrend is likely to sustain. |
After a bullish crossover, the moving average convergence/divergence (MACD) (12,26,9) has turned positive in a negative territory. The MACD (12,26,9) is the only indicator suggesting a mixed view. However, the ADX (14) and the stochRSI (14) may pull EWM to the previous low at 6.
Another bearish sign in Figure 1 is the bearish moving average crossover. The 50-day moving average (MA) is likely to cross the 200-day moving average from above. This crossover would boost the bearish forces that ultimately may result in pattern failure.
|I would suggest traders to watch the price fluctuations at current levels. If the next candle in Figure 1 opens below or near the low of the current candle, the bearish rally would soon hit the previous low.|
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