High Volume Doji on the NYSE and Trend Analysis

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Tonight's chart is pretty loaded with notes because I wanted to make it as educational as possible for those interested in technical analysis.  

It is best to just look through the chart and read the notes, but I wanted to talk about a couple indicators because they are less common and I rarely show them.  Indicators like stochastics and RSI, and to a lesser extent MACD are oscillators and are most effective in markets trading in a range, not trending markets.  Also bollinger bands are typically most effective as a trading instrument when the market is range bound as well.  Less commonly looked at are trend identifying indicators.  

The simplest trend based study is the moving average and that is probably the simplest way to gauge the current market.  However, there are some more exotic studies that aim to identify trending markets.  The two studies above and below the price chart are trend indicators.  The top one is the Directional Movement Index (DMI).  A trend is said to be present when the black ADX line is above 20 and rising.  Somewhat surprisingly this indicator has not indicated a trending enviroment at this point though that could change pretty soon I think.  The bottom indicator is the Aroon Indicator which also aims to identify trending conditions.  This indicator is showing a trend with decent strength currently.  So we have some mixed signals from these two indicators it seems.

The most interesting part of the chart (for me) is the candlestick pattern in relation to the bollinger bands and the January and February highs.  Thursday's session formed a classic doji candlestick in the NYSE cash index.  The upper shadow was long and pierced the upper bollinger band, but reversed to close below the band.  Volume increased from yesterday which shows an intense struggle at the current level.  This candle pattern is more reliable as a signifcant reversal if there is confirmation the following day (a down day tomorrow).

As I said a couple weeks ago, I keep focusing on the bearish evidence because the real money gauges of sentiment are on par with major market turns in the past.  Price has chopped around more since those extremes have registered, but prices have held up pretty well.  When price "ignores" these types of extremes I think it means those betting against the trend need to be careful.  Late last September the market was in a place where it "should" have been able to rebound, but it didn't for more than a couple days at a time and continued on into a panic phase.  While the emotions at tops and bottoms are different, it may be possible for an analgous upside blow off if prices are able to overcome this week's highs, so I think caution is warranted for bears with the potential catalyst of bank stress test results and so on.  If the current levels are convincingly exceeded, there is no obvious chart based resistance until the mid 900's on the S&P 500.  

I will post tomorrow in regards to exiting (or holding....maybe) the current BGZ trade.

Mini Market Update

Today is proving to be an interesting day.  For anyone who trades individual stocks or who is into candlesticks, I would look at the energy sector for short entry before the close.  Some charts that looked like good bearish formations are XTO, CAM, XLE, COG, OIH, among others.

Also watch QQQQ for a potential shooting star candlestick at the close, and also QID for a high volume hammer candlestick.

This move to new highs for the rally has rattled the bears hard, and I'll admit that I'm uncomfortable currently as far as near term outlook.  One interesting thing today is that Yahoo Finance has a headline today on their news stories saying "Dow 10,000 by the end of the year?"  On March 6th, the day of the bear market low to date, there was a story in the headlines about how even though the market had fallen so much, many analysts were suggesting it could fall farther and they had been wrong all year about calling "a bottom".....thanks for the timely warning.  While I don't put a lot of weight on things like this, these types of Mr. Obvious stories have tended to show up around significant turns.

Now while I think the best bet is still some short-term downside, I think we need to be careful with bearish bets if the market doesn't respond quickly with some downside.  A market that is ignoring typical extreme readings can be a dangerous one.  With the stress test news due out next week, I think short-term traders need to be out of any bearish trades by Friday's close this week or have stops in above this week's highs in the indexes.

On the trading front, I may adjust the limit order for tomorrow depending how the rest of today goes, but expect to be out by tomorrow's close.  For anyone that wants to put a stop in, a stop on BGZ at 42.00 should be "safe" as far as allowing downside into tomorrow without much risk of getting stopped out.

Looks Like a Good Bearish Set-up

Click on Chart to Enlarge

Today's chart is a little bit loaded, but the bottom line is that I think this bearish set-up is the best one from a charting standpoint that we have seen yet in this rally. The chart notes are self explanatory so look at the chart for those. Since the market is currently in a solid trend, divergent oscillator indicators will help show a weakening trend, but watching key moving averages will be the simplest and maybe safest way to get confirmation of a potential trend reversal. I would watch the 21 day EMA or 20 day simple MA for a close below it.

There has been a very consistent tendency for the market to give back FOMC day gains over the next 2 to 3 days if it gaps up and then closes 1% higher or more like it did today. The current sell order for BGZ is based on the fill of today's gap up. Hopefully that occurs by Friday for a nice quick trade.

As a side note, QQQQ and XLK (tech fund) showed bearish? shooting star type candles and lagged the other indexes today. XLF (financials) were well off from making a new rally high, and that is a non-confirmation that has occurred at intermediate tops with frequency during this bear market.

While I think things are set up for a larger decline, I am suggesting to use a limit order of 47.68 until Friday to hopefully sell BGZ before the upcoming bank stress test results next week.

Pete

New BGZ Trade

While the short-term model is not in the overbought region currently, it is working its way back there, and now that the market has made a new high, the model is showing a bearish divergence with the last overbought signal.

The hourly chart and 90 min chart are showing nice reversal candlesticks on the 2:00/2:30-3:30 ET time frame. Also the 60 min stochastics is just turning up to overbought territory. The tendency has been so consistent for FOMC day gains to be largely or completely given back over the next 1 to 3 days, that I don't see any reason not to enter a bearish trade here.


New Trade Recommendation


Buy BGZ ASAP with a market order. The current price is 44.90 which I will use for the blog entry price.


Pete

Equity Put/Call Ratio Starting to Turn Higher

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I justed wanted to show an updated chart of the equity put/call ratio with some moving averages that I had shown a couple weeks ago.

The averages look like they are starting to turn up, but it would be better to see them both point higher to signal a market top.

Today is a regularly scheduled FED meeting. The tendency in recent months has been for the market to gap up and move higher during the day on these days. However, those big moves have created great short-term bearish set-ups as well. The market is set for a gap up today, and I will likely wait until the afternoon before potentially suggesting a new trade entry.

Pete

OEX Put/Call Ratio Hits an Extreme

Just a quick post tonight......

Today the OEX put/call ratio was 1.53. This is a very high reading. This ratio is best used as a non contrary indicator (it is a "smart money" gauge), and it has pinpointed some significant turns during this bear market. The only 2 trading days this year where the ratio exceeded today's were January 27th and January 7th. Both of those basically marked tradable tops and were horrible times to initiate or hold bullish trades.

Also, SMH, the semiconductor holders index ETF, closed below the 20 day moving average today. That may be a leading sign of where the Nasdaq is headed in short order.

Because of the implied weakness in the S&P 500 right now in addition to the technical set-up and the above mentioned OEX data, I may suggest re-entering a bearish trade tomorrow. This will be a little bit different type of trade because the exit would not be a strictly short-term exit. When the markets are in a strong, tight trend of some duration like they are now, small counter trend moves will be enough to trigger short-term extremes. That will almost undoubtedly leave the bigger portion of potential downside on the table if exited strictly with the signals I normally use.

For new traders (or those with little short-term trading experience), if getting stopped out a few times in a row (though with only a small net loss the last few trades in our case) affects you psychologically enough to scare you out of entering the next trade, then the market has done its job on you, and you will often miss a move you "knew" was coming. That is not the end of the world because you don't need to catch every move, but sometimes it leads to "chasing" a move already well under way by the time boldness re-surfaces. Wider stops with a little longer time frame can be one solution. Another is to do what I've suggested the last few trades, which is quickly reduce risk after entry, but be willing to keep getting back in until you catch a large/sharp move in your direction.

Expect a new trade suggestion tomorrow.


Pete

SDS Stopped Out

The SDS trade was stopped out at 65.48 for about 0.5% gain. Anyone trading off the blog recommendations likely would have got in at a better price than the 65.15 posted entry. So hopefully your gain is a little bit bigger than that.

The market continues to chop around here, and is certainly doing its job of wearing down short-term traders on both sides of the market I'm sure. About the only thing I feel I can say for sure, is that the uptrend is weakening. Because of that, I am going to stay focused on looking for good bearish trade entries. I have my doubts that another solid overbought signal will come before the market falters a bit, but we'll see.

Because there has been no short-term indicator exit signal on this trade yet, I would be willing to re-enter at a better price later today or maybe tomorrow. So I am going to suggest using a limit order to potentially re-enter if the market approaches the recent highs.....


New Trade Recommendation

Place a "day only" limit order to buy BGZ at 45.56 or better.


Pete