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LEARNING FROM HISTORY, NAVIGATING THE PRESENT

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The tremendous market volatility is stressing many traders. My approach to tense situations is to push back a bit, look at the big picture, and then return to shorter-term charts for making tactical decisions. I am a huge fan of the New High – New Low Index and invite you to take a look at its signals with me. Let us review the weekly chart of the previous bull market and apply those signals to current events.

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(Ed. Note: The NH-NL Index will be available on StockCharts.com very soon.  Watch for an announcement on our homepage.) 

A bull market typically has three stages, clearly marked on this chart. If this is the model, then I believe that today we are between Stages 1 and 2, in a normal corrective zone. If this is right, how will the weekly NH-NL mark the bottom? If it follows the model of the previous bull market, it will signal a buying opportunity when it declines towards the minus 2,000 level. And where is it now?

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The weekly NH-NL stood at plus 604 on Friday, 5/14.  I wrote at that time that we were moving in the direction of a bottom – but not there yet.  This week's decline pushed the weekly NH-NL down to minus 516.  It is now closer to an important low, but more bottoming work needs to be done.  There is certainly no rush to jump in and buy.  We expect menacing price action to continue and the feeling of mass pessimism to darken in the weeks ahead.  Paradoxically, this will create a terrific long-term buying opportunity.

A combination of technical analysis, experience, and discipline provides the tools for understanding the markets and succeeding in them.  We share our research, including the analysis of NH-NL at www.spiketrade.com – and we cordially invite the members of StockCharts.com to visit us.

- Alexander Elder

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