Friday, August 5, 2011

Vintage Farrell

Yesterday, legendary technical analyst, Bob Farrell, published a one pager describing the extremes the market has come to in a very short time frame. The title says it all: "Capitulation".

The advice Bob renders is to avoid trying to catch the falling knife but the extremes reached yesterday are a reference point from which a test will likely ensue in the coming days. Should that test succeed, then the odds are favorable that a multi week rally will follow. Or as Bob puts it: "An initial rally will likely be a one or two day affair because all those who were buying the dips will now be selling the rallies. If the benchmark lows hold on a retest, then the market could set up for 2-3 weeks of recovery."

To be clear, Bob does note that a lower low may occur and that may set the reference point at a lower price point (his avoid catching the falling knife). However, my take of his advice is: if the 1 to 2 day rally is followed by a probing of yesterday's closing of 1200 and that does not produce another wave down, then the retest would be considered successful.

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