A Shooting Star at Resistance

Mar 13, 2008: 9:18 AM CST

Yesterday’s intraday action took prices to the falling 20 day moving average, and the resulting close formed a candlestick pattern known as the “shooting star” which happened to form at this key resistance zone.

What was the result? A powerful move to the downside this morning as the psychology represented by this pattern played out. The unfortunate side of this outcome was that, even if you perceived this pattern last night, the morning gap instantly reduced some of the profit potential you could have made to the short-side. It would have paid to have been aggressive and acted on this pattern prior to yesterday’s close, which I’m sure very few of us did.

I have magnified the chart to highlight the candle pattern that formed yesterday on the DIA (Dow Jones ETF).

Candlestick charting can provide trade set-ups on its own, but when you combine it with Western technical analysis, you can increase the odds of a successful trade.

One wonders how sustainable up moves in the market can be when both oil and gold continue to make new lifetime contract highs.

Oil breached $110 per barrel today while one ounce of gold tested $1,000 in the futures markets – both contracts making lifetime highs.

Combine these facts with the retail sales numbers declining sharply, and you have a recipe for strong weakness.  However, the market has currently pared all those losses and all three major US Markets (Dow, S&P, and NASDAQ) are higher on the day, after shaking off all this otherwise bearish economic news.

The US Dollar Index made new lifetime lows yesterday as well, closing at $72.33.

So, whenever one sees a rally in this downward trending market which stalls and forms some sort of bearish set-up (including candlestick patterns), odds seem to favor taking it and holding short and reaping profits more than trying to find a bottom or scour for potential bullish set-ups.

Visit INO.com TV for access to a plethora of educational video seminars to help you during this time, or for deeper education, check out a membership to Market Club.com, which provides far more tools including scanning, futures contract charting/analysis (including oil and gold), daily news, “trade school” education, daily market videos/commentary, and trading signals.

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