Click on Chart to Enlarge
This chart is IWM. It formed a bearish engulfing pattern yesterday with the daily RSI near 70 and right at the large gap down level from mid October. Notice that the stochastic study has a mild bearish divergence and is now opening up into a sell signal. If yesterday's low is broken that will trigger a trailing 1 bar low sell signal.
Given the larger context here, I think that could offer a nice very short-term trade. The blue arrows on the chart represent unfilled gap downs that are likely to attract prices on pullbacks. I think there is a high probability that the closest unfilled gap down gets filled pretty quickly if yesterday's low is broken. Then if the market closes below that gap level, it will likely move down to fill the next unfilled gap up as well before possibly moving higher.
If you watched my video yesterday, then you should know that we are approaching a potential upward pattern completion point. Because of that, I would suggest to be more inclined to take short trades on appropriate signals rather than longs, even though the traditional Santa Clause rally is due.
In 2007-2008 the market experienced a muted rally until around Christmas, but as soon as the holiday trade was done, the selling became aggressive. So basically if we don't see a good Santa Clause rally, that may be indication of implied future market weakness in that the most consistently seasonally strong period couldn't rally the market much.
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