Pullback Expected - Unfilled Gaps are the Short Term Target

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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.

Stock Market Update 12-12-12

Stock Market Update 12-12-12

This video provides a stock market update covering US markets and ETF's as well as foreign market ETF's.  The current upward pattern may have a completion and topping time frame around the Christmas holiday.  Several sectors of the US stock market and world market ETF's are pushing to new highs since the Oct 2011 low, though some are lagging well behind and may be ideal candidates for short opportunities in coming weeks.

Bearish Engulfing Pattern

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The SPY etf formed a bearish engulfing pattern Monday after filling the post election gap down and touching the 50 day moving average.  This may be program selling and initial profit taking on this move up, but suggests a multi day pullback should be expected.  Given the lower volume on the day, it may be weak program selling, and a push to new highs above Monday's highs, would like lead to some follow through to the upside.

In the larger context this could be the peak of a somewhat typical backtest of the broken Oct 2011-June 2012 trend line.  From my research and data on harmonic trading pattern analysis, the most common candlestick pattern that shows up on backtests of broken trendlines after completed successful bearish harmonic patterns, is a bearish engulfing pattern.  Again, the back test often peaks in the region where the trendline break took place on the chart, or at a fill of a gap down that broke the trendline.  Both are applicable here as well, though this pattern in the market averages is not the type of pattern my research specifically quantifies.

Additionally this bearish engulfing pattern is occurring as the RSI has approached 60 which is often the rough upper boundary for RSI in a downtrend.

On the weekly time frame the set-up has developed nicely for a dual time frame indicator short sale set-up.  The weekly MACD on the indexes is still in a sell configuration and this little rally has given the opportunity for a bearish cross on the daily MACD to possibly continue a primary downtrend.  The indicator set-up will be one to follow the next couple weeks.

You can learn more about the bearish engulfing pattern at this link.

Bearish Divergence Suggests A Pullback Soon

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The hourly MACD is now overbought with sharp bearish divergence suggesting that the market is likely to experience somewhat of a pullback, though the odds look favorable for at least some continuation of the rally afterwards.

Given the large gap down from the day after the election is not yet filled, it may be ideal for the market to push somewhat higher today to fill that gap before experiencing a multi day correction.  Then I think it would be ideal for a pullback to below Wednesday's low before a possible further move upwards.

Stock Market Analysis Video

Stock Market Analysis 11-27-12

This video covers stock market analysis on multiple time frames.  The hourly charts are overbought but without strong bearish divergence which suggests that price action may become choppy before a multi day pullback occurs.

Brief notes on trendlines, moving averages, unfilled gaps, and several technical indicators are covered.

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AAPL Chart Analysis - Probable Rebound Attempt Coming

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As I have detailed repeatedly in recent posts, the initial target for AAPL on this move down off the fall high was the low of the previous base around the $525 level.  On Friday we saw a big swoon below that level on high volume followed by a reversal to close above the old base low.

The candlestick was a very high volume and wide ranging hammer type candlestick.  It is not uncommon for an immediate reversal higher after a break of a major low like that.  Understand what is going on in the market at that point......Obviously many standing sell stop orders would be placed below that low based on chart support for the major uptrend.  So the market will typically push through those points where many orders accumulate to "wash out" the stops before reversing.  And obviously there will be some smart money placing orders to buy just under or at where those last ditch stop orders were placed.

So the bulls took control and pushed the stock higher.  Given that the markets are oversold on the daily chart time frame, I think we may see a multi day rally attempt from this point in the general market averages.

But in the case of AAPL, if the stock does rally from here but later fails and breaks to new lows, that would be a major failure for the stock and may lead to a continuation down.  On a short-term note, those wide range hammer candlesticks have about a 60% probability of future prices moving BELOW the mid point of the tail on the hammer even if the reversal holds.  Given the possibility of a significant rebound attempt in the stock, a set up like that can be followed intraday as prices move back into the tail region and then any upside reversal signals can be taken as long trades and often create an outstanding reward/risk opportunity.

When stocks that are heavily owed by institutions (as AAPL obviously is) top out, they can lead to some sloppy price action and volatile, choppy price moves as the topping process unfolds.

The general markets are not yet showing the typical bullish divergence on a daily frame that is typical of most corrective bottoms.  So I think we may be in store for a rally attempt for several days, followed by new corrective lows before a possible more sustained advance or rally attempt.

If you would like to learn more about the market forecasting techniques that I use to consistently pinpoint market turns and trend changes, then fill out the form on the right side of the page to receive my free stock trading video course, or click on the link above.