Markets have continued to fall since my last report, with the Dow Jones currently at 10211 down from 10620, and FTSE 100 at 5163 down from 5262. This is one of the most interesting situations in the market for a long time because of the various contradictions that are now occurring on the charts, together with the level bearish sentiment.

The fall in the Dow since my last column has completed a head & shoulders top area which would normally be taken as a bearish pattern. I don't want to ignore this pattern, and would advocate caution as it has a downside target of 8800, however, I have some doubt about the validity of this one because of its relative position on the chart, or what I refer to as "context". Context is a very important idea that says you don't treat every occurrence of a pattern in the same way, but you have to frame it against the overall picture, i.e. you interpret it in context taking account of the prior movement & relative position and not just the action of the pattern itself. So it's not enough just to say "there's a head & shoulders top so I'm bearish".

In this instance, we are being presented with a head & shoulders top about 15 months after the bull market low. That strikes me as being quite early in the cycle. Another factor is the way that the market went down, breaking the neckline at around 10,000 and then came back up again. A third point is the fact that we are on the verge of an important signal which has a very good track record on key US & UK indices over many years. This is a variation of Stochastic which is very different to the standard version, and it gives medium-term buy signals. In fact we have just had a tentative signal on the UK market.

So it's a very mixed picture. Levels which I identified in my last report were broken, but there was no real follow-through. I sense that the market had a chance to break sharply lower but didn't take it. I also feel that there is an overwhelming bearish concensus. It's a really tricky one to call - and I'm not claiming that I can because I don't think the odds are…

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