Back on September 5th I wrote about a potential intermediate term top in the DJ internet index here. As we know by now, topping patterns in strong uptrends are likely not to complete since you are going against the longer-term trend which is why this example was only a “potential”. But, all trends eventually end so they should not be ignored. In this case, the downside target down at “T1” was significant enough to grab my attention. Not evident from my chart, the internet index was forming a topping pattern warning of a move lower while the broader market continued to move higher, pointing to clear divergence.
Fast forward almost two months and here is what has transpired since the post. The price of the index eventually broke below the (red) support line and chopped sideways for a couple of weeks. From there it attempted a quick rally, back-tested the underside of (red) support and immediately failed.
As you can see, the index has fallen and currently sits right on the T1 target. This is an area that should act as support and as such would expect price to consolidate or possibly reverse higher. If you shorted the index on the setup, congratulations, I would be banking profits. Going forward if the index can hold support it will present a nice, reversion to the mean investment trade. If not, this index and likely the overall market is in deep trouble and set up for a larger move to the downside. In my humble opinion investors should be treading lightly here waiting for confirmation this is something other than a “potential” bottom before committing investment capital.