Tuesday, July 21, 2009


Earnings beats. New S&P 500 closing high for the rally. Recovery talk. Nasdaq up 9 days in a row without a pause. Short-term bears are switching teams.

From a contrarian point of view, this sounds exactly like a market that is topping, not a market that is breaking out. Euphoria and shake out of all weak bears. When you look at candlesticks, each one tells a story and you can view a chart in terms of battle lines (resistance/support levels from gaps and prior significant highs/low) and battles that occurr on those lines. You pay close attention to who wins the battles at those lines.

Since yesterday the S&P made a new closing high for the rally, I thought the best chance for bears to hold would be on a gap up and engulfing pattern (sell off to close below yesterday's open) today. The fact of the new closing highs will draw a lot of media attention, etc and often result in a significant influx of less than savy money with market orders going into the next day's open. Also in this case if the gap takes the market above a prior high, you are assured that stops will be at those levels and the new high will really clean the slate by triggering the last ditch buy stops. We saw that this morning it seems.

While only at the close today will we know what candlestick is forming, today looks like it has a good chance for a bearish engulfing or dark cloud cover. Since this is occurring right at a major resistance area, a reversal candlestick pattern should be taken very seriously.

More to follow today or tomorrow on trade follow-up action for SDS and BGZ.


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