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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Introducing Newsflashr, Headline News Tracker

Mar 12, 2008: 5:16 PM CST

Last week, I was introduced to a new site called NewsFlashr, which was developed by the creators of the amazing Instant Bull stock market news/information website.

NewsFlashr allows you to view headlines on selected topics quickly and easily, on such areas as World News, Politics (including the 2008 elections and primaries, which I follow daily), Business, Showbuisness, Technology, Sports, Science, and Medicine.  It gives you a convenient diversion if you’re tired of reading stock market stories all day long!

You can also follow larger blog entries on Business and Politics headlines.

Furthermore, each category has a ‘text cloud’ that shows you the most popular keywords in real time.

You can also view multiple feeds from top news sites in a simple to view page that’s even better than creating them yourself at their News Feed Page (I’m linking to the Business Feed page here).

The site also gives you headlines in each section based on the top 5 terms searched (keywords) up to the minute.

The site is updated in real time, so it will be helpful to check it often.  I can tell I will be using this site often, and may even make it my homepage!

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Zero in on Tuesday’s Action

Mar 12, 2008: 12:43 AM CST

Let’s look at the 5-minute chart of the price action in the stock market during yesterday’s trend day:

The initial gap was about a 200 Dow point ($2.00 DIA) gap, meaning odds were strongly against a full gap fade, and actually favored that a trend day was setting up.

Even still, the first trade is always to fill the gap. If your stop gets taken out, so be it. In this case, we were playing only for a 50% retracement, which actually reversed near the penny (intraday price lows) for a maximum target for the fade play.

Taking profits at this level (right at 12:00 EST), you could have aggressively put on a long (buy) trade to target a minimum of the intraday price high (gap high).

Price formed another swing low to form a type of double bottom, confirmed by a positive momentum divergence. Also, at this time, Dr. Steenbarger noted a more pronounced divergence occurred with the NYSE TICK indicator, as the indicator failed to make new lows (by making a visible higher low) when the market tested this support zone. Check out his chart for a different perspective.

Price then rejected this low and formed a new swing high, which (omitting the initial impulse caused by the gap) formed a new momentum high. The fact that price shifted to crest above the key moving averages should have clued you in to shift trades to the long side, or exit any existing intraday short you may have been holding.

Where was the highest probability trade of the day? That answer is arguable, but I would suggest that one of the highest probability, lowest risk trades came at 2:00 EST with what Linda Raschke and others would call a “First Cross Buy” trade, and what I would consider an “Impulse Buy” style trade.

Notice the red arrow where I wrote the word “Cross” at the bottom of the chart, which highlights when then red ‘trend’ line crossed zero. The first pullback in the black line of the indicator to the red trend line often signals this high probability trade, which corresponded very nicely with the rising 20 period moving average (which was comfortably above the 50 period at that time). Your stop would be placed just beneath the rising 50 period moving average, and you could have played for a larger target due to the structure of the potential trend day expectation.

Sure enough, holding that trade would have been the best strategy (of course it’s easier to see that in hindsight), and exiting at the close. I exited early, believing we would have resistance or at least consolidation at the Dow 12,100 level (DIA $121.00), but we can win every penny of each trade we enter.

The large price spike at the close signified either that traders were not willing to hold the market short overnight, or were wanting to hold short, anticipating some sort of overnight gap (probably it was a combination of both).

By the way, the Financials (sector) had the largest percentage gain today at just over 6.5%, followed by the Materials and – of course – Energy as Oil topped $108 per barrel. The only industry to suffer today was Health Care (not shown) which declined less than 0.2%.

Tomorrow should be interesting, but I’d almost guarantee it won’t be as stellar (400 point move) as today’s move. Some sort of consolidation may be ahead, but then again this large move may have a bit more steam in the next few days. I’d watch out if I were short and might speculate if I wanted to get long here.

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A 400 Point Dow Day?

Mar 11, 2008: 8:32 PM CST

Before you get ultra bullish, realize that the sharpest volatility price moves to the upside often occur during a bearish downtrend. That’s likely what happened today.

The day began with a strong upside gap in all US Indexes, and proceeded to a near 50% gap fade, followed by a strong surge of buying power (combined with short-covering) into the close.

When the dust settled, the Dow Jones Index climbed more than 400 points today, representing a 3.5% daily increase over yesterday’s close. The NASDAQ and the QQQQ ETF closed 4% higher today.

Did anything change on the daily chart (DIA is shown)?

The quick answer is surprisingly “no.” Although price completed a large volatility price move to the upside, it is still beneath the falling key 20 and 50 period moving averages, which are both a good distance beneath the 200 period moving average, representing the most bearish orientation possible.

If indeed price continues to trend higher as it may, price will have likely broken these key averages and carved out a higher low than the January lows. This does little to change the current bearish structure at the moment before more buying (with short-covering) enters the market.

Volume was relatively light today, given the large magnitude of the intraday price swing, and unless we get higher prices on higher volume, then there is a developing divergence.

Did much change on the weekly chart? Let’s peek at the S&P 500 chart:

There appears to be a larger consolidation pattern taking place within the larger frame of the market, which has yet to break either up or down. Price has tested and successfully defended both the rising 200 period moving average and (near) the January intraday low.

Let’s rise a little higher and peek at an interesting insight on the S&P 500 monthly chart:

 

The S&P 500 Index recently inflected twice (intramonth lows) off the 38.2% Fibonacci Retracement line drawn from the bear market low to the recent bull market high.

Price also has failed to close beneath the key 50 period moving average (which could act as support) on the monthly chart. Notice that the last 4 months in the market have closed lower.

Odds may shift to favor a counterswing up, but recall that the upward swing is currently just that – a counterswing. Until the trend undergoes the formal change from down to up, we are still in a relatively dangerous situation for buying stocks at the moment.

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Off to the Races!

Mar 11, 2008: 1:27 PM CST

I think the Market shocked a lot of people today by making such a large volatility upwards price move, both in reaction to the Fed announcing a $200 Billion stimulus package to help the credit crisis, and by shorts covering to avoid being steamrolled (combined with new longs buying in anticipation of a bottom – or bottom fishing).

Let’s peek at the intraday action just before the close:

dia15m.png

The opening gap that was beyond 100 Dow points was the first major clue that a trend day up was likely to occur. Breadth was highly skewed to the upside, though the near 50% gap fade took care of some of the disparity, only to have it resurface into the afternoon.

Both on the 5-minute (not shown) and the 15-minute chart, price pulled back to key moving average support before pausing and rocketing higher into the later afternoon, forming a neat 45 degree angle bull flag which has just now achieved its price projection target (which also corresponded with the falling 200 period moving average on the 15 minute chart).

Although the pattern is similar on the QQQQ (NASDAQ ETF), price breached the key moving average support levels there (further confirming my preference as a Dow Jones ETF and @YM Dow Mini Futures trader):

Also, I have not annotated this QQQQ chart so you can see the pure price patterns and momentum readings as they exist currently. Notice the recent divergence that has formed as price made its most recent up-swing into resistance.

The bull flag pattern here also completed its objective and appears to be failing currently at resistance.

Today will be an excellent day for you to go back, print out for your records, and annotate the action for the betterment of your pattern recognition skills, and will serve as an example of a reversal countertrend-day up.

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