Doji Sell Signal and Nonconfirmations in Dow Jones

Sep 14, 2009: 12:04 PM CST

I wanted to start the week by looking at the Dow Jones Industrial Average ($INDU) and noting a “doji sell signal” that has formed after a week-long rally that has formed negative volume, breadth, and momentum divergences.

The structure is almost identical in the S&P 500, which is finding resistance at the 1,044 area and has also formed a doji on Friday’s trading session.

I’m showing the McClellan Oscillator (bottom panel) which is a “Breadth” oscillator (full information on this indicator can be found at MCOscillator.com) that compares the net advancers minus decliners.  According to StockCharts.com

“Similar to MACD, the McClellan Oscillator is a momentum indicator that is applied to the advance/decline statistics. When the 19-day EMA (shorter moving average) moves above the 39-day (longer moving average) EMA, it signals that advances are gaining the upper hand. Conversely, when the 19-day EMA declines below the 39-day EMA, it signals that declining issues are dominant. As a momentum indicator, the McClellan Oscillator attempts to anticipate positive and negative changes in the AD statistics for market timing.”

What we see is that the 3/10 Oscillator (middle panel) is very, very similar to the McClellan “Breadth” Oscillator (bottom panel).  It is a “momentum” oscillator that I use in all charts I view and both the 3/10 and the McClellan Oscillator are showing negative divergences or non-confirmations with the recent price rally highs which is ‘bearish’ according to classical technical analysis.

In addition, a doji (often known as a ‘reversal candle’) has formed near the highs of the upper Bollinger Band (a standard deviation indicator).

Volume has been declining as price has been rallying, locking in another non-confirmation of higher prices.

Does this guarantee a price reversal down?  Of course not, and in fact, buyers (bulls) have managed to thwart sell signals all the way up on the rally off the March lows, so take this with a grain of salt.

However, do realize that odds/probabilities do seem to favor a retest perhaps of the 9,300 or even 9,100 as having higher probability than a skyrocketing move up from here – in other words, the risk remains to the upside right here and reward – however short-lived – exists to the downside.

Continue your own analysis, but for now, be cautious in expecting further gains, unless we get a sharp up-bar (up-day) this week.

For a bit of fun trivia, did you know that the Dow Jones Index closed at 9,605 on September 10th, 2001 and now eight years later, the Dow Jones closed once again at 9,605 on September 11th, 2009.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

3 Comments

3 Responses to “Doji Sell Signal and Nonconfirmations in Dow Jones”

  1. ETF FOOL Says:

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  2. emini Says:

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  3. emini Says:

    Hey, nice post, very well written. You should write more about this.