Monday, April 6, 2009

Hanging Man Candlesticks

Click on Chart to Enlarge

First off, the opening price of QID this morning was 43.45 which will be the entry price for the blog trade. When I made the previous post it was about 6:30 AM ET and the futures were up about 0.5%. But the futures fell significantly after the morning news flow started, and resulted in a decent size gap down rather than a gap up.

Secondly, with how steady this uptrend has been, the short-term model is likely to become oversold rather quickly compared to during a downtrend, so any additional weakness tomorrow may lead to an exit signal.

Thirdly, IF the S&P 500 moves down below 778 over the next 2 or 3 days, then I will suggest placing a profitable stop loss order on the BGZ trade and assume the top has been made for this rally. Right now, it looks like that is possible, but it also seems possible for another push to new highs over the next week or so.

Now to the chart.....The chart above is DIA which is the standard Dow Industrials ETF. The chart shows 2 consecutive hanging man candlesticks. These occur when the market undergoes an early sell off followed by a recovery toward the opening price. The real body is small (less than half of the lower wick). Also, there should be little to no upper wick on the candle. For interested chart readers, $INDU and $SPX (the Dow and S&P cash values), today formed a classic hanging man candlestick with a black real body, which typically is considered more bearish than a white real body.

Three days ago, a shooting star type candle formed as the large gap up and early advance faltered a bit into the close and closed off the highs. So we have three potentially bearish candlesticks in a row in DIA. Also, the gap up Thursday after a strong, nearly vertical advance, has many characteristics of an exhaustion gap. What we are missing is price confirmation both in magnitude and in rate of decline to be able to have some confidence that a top of some significance has been made.

So from here, the QID trade is easy to manage....just exit at the next oversold signal from the short-term model. The BGZ trade is a little trickier, but I will make an evaluation at the next oversold signal to see whether it makes more sense to exit then and look to re-enter in coming days, or to place a stop loss somewhere and hold in anticipation of a larger move down.

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