Don’t Let the "Kiss of Death Retracement" Kill Your Profits

Beware the kiss of death… After all, the "Kiss of Death Retracement" is a chart pattern that's threatening to crush the top stocks in your portfolio. But as usual, when you know how to spot a predictable pattern, you don't need to fear the fallout – we can make a profitable trade from it instead. Here's how to spot – and profit – from the "Kiss of Death Retracement."

To say that this market has been a tough one would be an understatement. Last week, the S&P 500 managed to eek out a gain of 0.9%, but you sure wouldn't have thought that if you were following the market. Three out of the last four days the S&P 500 has had 20-point mood swings, with the Dow showing 150-point plus whipshaws last week.

 

Over the last few weeks you've heard me talk about how the NASDAQ Composite leads the markets, and sure enough one look at the charts below shows the OTC leading relative to the S&P 500 and Dow.

While the S&P 500 and the Dow are still locked in down channels, the NASDAQ has broken above it. So, does that mean that the S&P 500 and Dow have to play catch up to it?

Not necessarily – if the NASDAQ breaks to the downside, the S&P 500 and Dow are going along for the ride. One look at the chart above also shows us tracing out the exact same pattern we have embedded in the chart above – the exact same one that I brought to your attention a few weeks ago. Here we are just like clockwork...

That aside, what else is going on in the chart above?

Elliott Wave Theory shows us a classic 5 waves down of 1(A), then a 3 waves up (abc) of a potential Wave 2 (B). Right up to the 38.2% Fibonacci level too I might add. From here all you need to know is that Pink line, a break of it to the downside sets in motion one of three things.

1. A morph of the pattern.
2. A retest of the lows or more.
3. The start of the C wave down to the 200-day average.

Don't understand Elliott Wave Theory? I'll try to make it as simple as possible for you in the charts below. All you need to know can be found in the pink lines – a downside break through the pink gets the ball rolling to the downside.

Right now the market is at a fork in the road. The big question right now is whether we'll head for the 50-day average and some Fibonacci levels…

As a reminder, Fibonacci levels, which mark off naturally occurring Fibonacci ratios on our chart, are key indicators that technical traders use to find key support and resistance levels. The NASDAQ may have already made that call and reached minimum Fibonacci requirements for a countertrend rally. Odds favor that the index will be the first to tip its hat next week.

All rallies ought to be capped by either a Fibonacci retracement level (38.2%, 50%, 61.8%) or the 50 day average. Be aware of news driven futures-related pops in pre-market – do not get sucked into them on the long side.

The bottom line right now is the fact that the markets are in an overall downtrend right now.

 

I figured since Valentine's Day was last week, that it would be fitting to talk about kisses... Or at least "Kiss Of Death Retracement" (KODR) patterns.

This is what I call an issue that has broken an uptrend and comes back up to kiss the underside of the uptrend it's just broken, only to be turned away. The issue tends to roll right back over to the downside shortly there after. In other words, it's a trendline break to the downside with a snapback rally.

As you can see, after the last "Kiss Of Death," the Dow promptly rolled over. While we are on this chart we want to bring your attention to the green rectangle boxes in the RSI section. What I want you to notice is that while this index was in a clearly defined uptrend and above the 50-day moving average, notice that it never really ever broke below the 50 level during that time.

Don't be surprised going forward that while we remain in this correction the RSI will now have a hard time going over the 50-day level. Start to watch for that.