In The Land Of The Blind...

Futures are hanging out around the 826 line - basically where the S&P closed yesterday and pretty much where it's been hanging out the past 3-4 days.  At some point pretty soon things should jump one way or the other - futures aren't giving any clue whether today is the day....

Here's the close for the past 4 days:

Friday Aug 21 - 1025.13

Monday Aug 24 - 1025.56

Tuesday Aug 25 - 1028.00

Wed Aug 26 - 1028.12

The S&P formed another Doji day yesterday - that's 3 in a row - how's that for indecision?  It's almost as if neither the bulls nor the bears want the ball.   And it does wonders for any indicators such as MACD-H that measure momentum - because there isn't any!   Here's a chart:

S&P 500 - Daily Chart - 3 Months

The S&P crossed over the 1000 line on Aug 3 - the first trading day in August - and in the month since then it's gained all of 26 points.   Way to go bulls!  The question is whether this pause in momentum (and don't forget there was another 10 day pause between 1000 and 1018 to start the month, before the dip down to 980 and then back up again - so pretty much more than 1/2 the trading days in August (there are generally 21 trading days in a month) have been a dead summer calm) after the big run-up for the past 5 months is just a consolidation before things move higher - or, as the indicators seem to want to indicate, and the general consensus by everybody that this market is extremely overbought (up over 40% without any meaningful pullback - what's that about?), and the fact that September is notorious as a bad month - is this statis basically the market turning over?  Sometimes it happens on one short shock - sometimes it's a slow process like an ocean liner changing course.    The CNBC folks have been wondering all morning why the market the past couple of days hasn't reacted in a better way to "good" economic reports the past couple of days.   Dudes - everyone's at the beach.  Maybe that's why.

Anyway, you can't argue with 3 dojis - neither the bulls or the bears are in control and things are drifting in a fairly tight range.   They should pop - but when?  Is it really going to take until after Labor Day?

Here's a clue in the intraday chart:

S&P 500 - 10 Minute Chart - 4 Days

See that fairly obvious triangle?  That's been the price action the past 2 days - doesn't show in the dojis on the daily chart, does it?   According to this, things should be getting ready to pop pretty soon, no?  Which direction?  Triangles are generally (but not always) continuation patterns - so since the market has been in an uptrend,   the odds are that the pop will favor the bulls and pull things upward.   Will it happen - or will the summer doldrums smother any movement for lack of interest and participation?

As was the case yesterday - look for a break past 1038 on the upside to favor the bulls - and anything below 1022 to favor the bears.  Anything in between may set us up for another Doji.  Lot's of people expect all hell to break loose one way or the other come September - this may be just the calm before the storm.

Good luck!

The S&P closed yesterday at 1028 after failing again at the mid 1030s.  Overnight futures started lower, rose up to where they were at the close, and then dropped back again indicated a lower opening today - but as with the market the past couple of days in general - without much conviction.

Yesterday was another doji day - a "gravestone" doji where the open and low are close to the low of the day with a long tail above and very little tail below - like a gravestone sticking out of the earth.   Prices rose at the open indicating early bull strength,  but the bulls failed to hold their gains and the bears pulled prices back down to close near the open.   This inidcates a lack of strength on the part of the bulls that they were unable to hold on to their gains, but also a lack of strength on the part of the bears because they weren't able to generate enough strength to actually pull prices lower than where they started.

S&P 500 - Daily Chart - 3 Months 

A gravestone doji appearing at the top of long uptrend is often considered to indicate a trend change, although, as with many Japanese Candlesticks, price action the next day is needed to confirm the indication.   It is considered normal for the market to stall for a day or two after a big advance, but at some point any breakout needs a "follow through" - another very strong  day - to confirm that the breakout wasn't just a one trick pony.  So far the market obviously hasn't been in the mood for a follow through - and until it does, Friday's breakout won't be considered an important start to a renewed uptrend.  

The gravestone doji isn't what I consider a "good" doji  for the bulls - the lack of ability of the bulls to hang on to their gains is a sign of weakness - which isn't what you want to see as healthy for an uptrend.  The only thing that is keeping things from falling isn't the strength of the bulls, but, rather, the lack of strength of the bears.   At some point one side will dominate - but that sort of uncertainty doesn't really bode well as a sign of upward trend strength.  A bunch of dojis in a row, such as the beginning of June when the S&P first tried to get through the 200ma and failed, in my experience doesn't lend itself to trend continuation.

I went back through the charts looking for similar pairs of these kind of dojis with long top tails and short or missing bottom ones and didn't see any at all of this type since the March rally started - which to me says that maybe this type of double doji isn't comapatible with a strong rally - but I don't want to read too much into it until something actually happens - which may have to wait until after Labor Day.

That's it from here.  We have resistance in the mid 830s - any move above there (that holds) is a sign of bull strength - and potential support which hasn't been tested down around 1014 - which, if broken, is a sign of bear strength.   In the meantime we are in a fairly tight range waiting for direction - so take your cues from the market.

Good luck!

The S&P made it up as high as 1035 on Monday before the bears finally showed back up and pushed things down to 1022 before closing at 1025 and forming a doji day. 

This futures chart is on a 20 min delay - S&P futures dipped overnight, but are now currently up about 6 - indicating a higher open.

Doji Day - remember Doji indicates "Indecision" - the market opens - the bulls push things up, the bears come in and pull things down, and eventually it all closes more or less where it opened.  When it occurs after a long trend, it can be a symbol of trend change (before, the bulls were clearly in charge - the doji represent a loss of control by the bulls, although the bears haven't yet taken over). 

As with many Japanese Candlesticks, the doji symbol needs to be interperted with what comes the next day to be meaningful.   If, say, there's a doji at the top of an uptrend, and the next day gaps down at the open and continues downward during the day, then the doji would have illustrated a change in control from the bulls to the bears.  On the other hand, if the next day opens upward, it merely signifies a pause in the uptrend, and possibly a sign of potential trouble ahead as the bulls are starting to show weakness and less commitment than before, but are not ready to give up full control.

Here's a daily chart showing the Doji

S&P 500 - Daily Chart - 3 Months 

You'll notice that I put a Bollinger Bands on this chart.  I was going through some websites last night looking for an illustration of a doji to use for the blog - and the one website that I was looking at stressed how dojis at the top of a long trend and especially if also at the top of a Bollinger Band, signify potential trend change.  So I threw in the Bollinger Bands, and sure enough, yesterday's doji was at the top of the band.   Forewarned is forearmed - as they say.   But you still have to watch the next day's price action to confirm the trend change, and today's open doesn't seem to support this interpertation of the doji.  So I would guess that at this point the S&P will keep moving forward - at least for a little while.

PEGA

You know how I love - love, love, love - the MACD-H setup where if the MACD-H and price both hit multi-month highs on the same day, that if there is then a dip in prices, then the previous high price should be retested - well take a look at PEGA:

PEGA - Daily Chart - 3 Months 

 I put some circles around what I'm talking about - back in early August, PEGA was hitting new multi-month price highs and MACD-H highs.  Then prices took a substantial dip - dropping from 32 down to 26 on the 18th.

But - Lookie, Lookie, Miss Cookie! - see where it is now - back up to where it was above 32 - a nice 23% return in 5 days.  Not too shabby.  I love this setup.

That's it for now - big day at the salt mines today so I gotta run.    Looks like the bull side is still the place to be - although, be vigilent, as always...

Good Luck!

S&P 500 - Daily Chart - 2 Months

Yesterday's price action on the old S&P was yet another hammer.  If you look at the chart of this uptrend since early July, the hammer seems to be the most predominant Candlestick on the chart during this trend.   The hammer, in review - price opens - moves down to form the long bottom tail or wick,  the moves back up again to finish near the open and near the high of the day.   2 features are important - the bulls were unable to generate any strength from the open - the bears were able to drive the price down.  But then, once the price the down, buyers came in and pushed the price right back up to where it started.   Hammers at the end of an uptrend are generally viewed as portending a trend change - the story they tell says that the bulls are losing their mojo and their grip and the bulls are basically just holding on as opposed to advancing the trend.

Look at the candlesticks during the downtrend through the end of June and into early July.  Notice how on down days (solid colored candlesticks) in a downtrend the close often ends up near the low of the day.  During this part of the downtrend there were at least 5 days with completely solid down candlesticks - prices opened at or near the daily high, the bears took over and drove prices down, and never gave up.  Now compare that to the candlesticks during the uptrend - since early July, price has closed near the top on the vast majority of days, regardless of how far down it went during the day.  On those days where the bulls were especially strong they pushed the price straight up from the open.  On the other days they let the bears take over and then came back at the end to form the hammers.  And all of this drama is playing out on very weak volume.

The way I'm reading this is that after July 4, the bears took the summer off and went to the beach (or maybe the mountains).  Those still left only have enough strength and numbers to pull intraday prices down but can't hold on - and buyers, such as there are with the low volume, pull things back up - the old "buy on the dip" thing but on a very micro intraday basis.

So I see this as an ephemeral summer market.   Neither side has enough strength in numbers to dominate and force a solid trend (hence this disconnect between, say upward prices and downward MACD-H) and things are just sort of bouncing along vaguely upward almost like a balloon held by a small child.  Every day he gives it a tug downward, but then it just rises again because it's filled with air (which is very passive, compared to rising because of generated strength).  And right now the balloon seems to have hit a ceiling.

At some point the bears will come back in force from their vacay, and the hammer days and the ephemeral summer market will end.   Rather than pulling the prices down intraday only to lose their grip and let them rise again, the bears should be back in force to force a downtrend.  Keep an eye on the candlesticks - as long as they are hammers the balloon should keep on bumping along.  But once we start getting some solid down days like before July 4, when the bears manage to hold prices down into the close, will be the clue that the ephemeral summer market is over.

Futures Watch

There was a spike overnight, I guess when they announced the China numbers (very good 10%+ growth, for what it's worth), but otherwise things are basically unchanged.   We are at the bottom of a strong resistance area and just above 1000 which should be support.   So things could be rangebound again like Monday.  If you look at the daily chart, Friday and Monday price action created a small triangle.   Breakout should be in the direction of the trend, so if there is a breakout in one direction or the other, that could be a key in helping us identify the trend for the remainder of the summer.   Will the balloon bounce against the ceiling, or will it take off and fly?

Futures are way up this morning portending a big opening on the markets for the month of August.   Will this be enough to push the S&P over 1000?

I've been having a lot of problems posting lately - for some reason this program has become almost incompatible with my mouse, jumping all over the place and eating my blog entries (I lost 3 over the weekend and gave up - oh well...)  And for some reason, the site that I usually go to for my intra-day charts (www.barchart.com - awesome site!) is saying that it can't find any stock named S&P500 and can't draw the intraday chart (it can do the daily and weekly nicely though).     So while the stars seem to be aligned against me, hopefully they will be on the side of the markets.  I'll take one or two for the team...

So here's a daily chart instead:

S&P 500 - Daily Chart - 29 Days

First off, I want to point out something very important - look at volume rising for the past 6 days.  No rally goes anywhere without increasing volume.  The big boys need to have conviction that the movement is for real, and buy in.  And this is finally happening.  If today turns out to be a big up day, keep an eye on the volume - hopefully it should be up over Friday.

Next go up and look at prices - Thursday's and Friday's price action formed a small mini-triangle going into today's breakout.  Note - Friday was more or less a Doji day - price opened and closed in the same area and more or less formed a cross candlestick.  Doji means "indecision" in Japanese - it's a signal that the prevailing trend has paused or is about to reverse - but it doesn't automatically mean that it is a reversal - just a pause.  As with many Japanese Candlesticks it's important to see the next day's price action for confirmation or clarity.

I also drew on the chart a short horizontal line showing the 982 resistance that stopped the market on Monday.  It was tested as support on Friday - very bullish.  If the S&P does bounce back off of the 1000 level, look to that area as a line in sand - if the bulls are still in charge after hitting 1000, it should be a support if reached.  If the bulls are traumatized from a failed try at 1000, and have given up momentum to the bears, then 980-82 not holding on a pullback would be an important clue that this has run out of gas.

The only bothersome thing is the MACD-H - signalling a divergence (price is going higher, MACD-H is going lower).   If today turns out to be a big up day, then I would expect the MACD-H to start reversing and going back up.  If for some reason today starts strong and peters out and doesn't reverse the MACD-H, then I would expect that the divergence will eventually win out and this rally won't be sustained.

Better quit while the quitting is good - before this thing crashes or before I jinx things. At this point FAS futures are up over 6% - could be a good day.

Good luck!

S&P 500 - 15 Minute Chart - 4 Days

The markets decided to take off (as in a rocket, as opposed to a vacation) this morning -and are currently (1:30ish EDT) up 2+% on good volume.  Things have been relatively quiet during the past week and the S&P and Dow spent some time hanging around their 200ma lines - but that lack of velocity came to a sudden end this morning.  And even though I'm not showing the chart, the Dow joined the S&P and finally took out it's 2009 intraday high today.  Good times for the bulls.

I was at the salt mines until quite late last night and finally got home well after midnight and just did a cursory check of the charts.  I did want to discuss briefly the S&P chart from yesterday, as there are a few things worth discussing (and I wish I could have gotten to spend some more time and gotten to post this earlier, but, oh well...)  But here's the chart:

S&P 500 - Daily Chart - 3 Months

I'd to talk about three things on the chart that bear notice:

1) Yesterday's price action resulted in a "Doji" (Japanese for "indecision") candlestick.  The market opened, it went up, it went down, and it closed pretty much where it opened.   Neither the bulls nor the bears were able to take charge.   After the Hammer setup on Tuesday, with the possible dire consequences if the bears succeeded in pushing things down,  the fact that the bears weren't able to do anything with the opportunity presented  is what probably resulted in the resumption of bullish sentiment today.

But, for what it's worth, look at the large bullish candles almost every day since the 13th showing the very strong uptrend, and then for a couple of days no movement at all while it waited to decide what to do...  That's what to look for in a Doji - it's a pause in whatever trend has been happening while the bulls and bears evened themselves out again.  Like many Japanese Candlesticks, the Doji needs a confirmation follow through the next day.  As today shows, don't assume that just because a doji shows up in a strong trend doesn't automatically mean reversal - wait and see what happens the next day before taking action.

2) Look - Oh Look! - at the 13, 26, and 50 day moving average lines converging -  this is important.

One of the reasons for having multiple MAs on a chart is, as I mentioned the other day, to illustrate market direction by the position of the MAs lines in relation to each other - a strong uptrend will have the shorter MAs on top of the longer MAs as price rises and a downtrend will have the longer MAs on top of the shorter ones.

Another feature of watching multiple MAs is that when MAs of different lengths converge, as they did in yesterday's price action, it generally signals a BREAKOUT!!! - trading opportunity.   And that is the certainly the case today.   And after today's action, the 13, 26, and 50 will all be in the proper order for an uptrend (although still below the 200 - look for their crossing of the 200 as bigtime confirmation of the uptrend).  This was the first thing that caught my eye last night, and I went to bed actually a little excited (do this long enough and that is what happens to you - be warned).  That's the sort of thing I mean by charts telling a story and giving clues - if you only know how to look for them.

Which leads to:

3) MACD-H.  Haven't talked about this for awhile, but, MACD and MACD-H are my favorite indicators.   They put the "trend" in "trend following".

MACD-H is the vertical orange lines travelling away from the 0 value in the center of the lower portion of chart.  They measure the distance between the fast and slow lines of the MACD (the long blue and olive lines running vertically).  The bigger the distance between the MACD lines (the larger the MACD-H bar), the stronger the momentum of the prevailing trend.  

One thing to look for in any chart where prices are making new highs is whether or not the MACD-H is making new highs too.  Rising price should be accompanied by rising volume and rising MACD-H.  If not, the uptrend is suspect - and this particular uptrend has been suspect for awhile.  

When I'm looking at stocks, I screen for those that have hit new price highs - but I only consider going in on stocks where the price high is also accompanied by the MACD-H high.   High price and high MACD-H generally idicates continuing upward momentum.  High price and low MACD-H indicates momentum is fading, and so will the uptrend.    If you have access to charts and are able to scroll back and look at past price action, follow the price movement and the MACD-H and see what I mean.

As a trend follower, my motto is "buy high, sell higher" - I will buy as long as the MACD-H is high and sell when the MACD-H starts failing.

So, finally, in the past 2 days, MACD-H has been making multi-month highs to go along with multi-month price highs.  I consider this extremely bullish.

Both MACD-H and MACD give good buying and selling signals.  With the MACD, the normal buying signal is generally when the lines cross over the center o line coming up. That also is in the process of happening as you should be able to see.   If you have a high risk tolerance, another MACD buy signal is when the fast line crosses up over the slow line (fast line over slow line = uptrend; slow line over the fast line = downtrend) - which also coincides with the MACD-H crossing the center 0 line (remember the MACD-H is the distance between the two MACD lines - when one crosses the other, the MACD-H automatically crosses the center 0 line). 

One can also glean some good information from the relative sizes of the MACD-H impulses (I think of the cycle of each MACD-H when it goes above and below the 0 line as a bullish or bearish "impulse".)  The relative size of the max or min point of each impulse, as well as how many days duration it has, gives an indication as to whether the bulls or the bears have the most relative strength.

Looking at the 3 months of this chart, it have been fairly evident that the bearish downtrend impulses have exhibited much stronger momentum and were longer lasting than the bullish uptrend impulses.  Even while price has generally been drifting higher, which, should signal a downturn (higher prices should have higher MACD-H, remember?). 

But now suddenly, the MACD-H is quite respectably bullish and showing increasing momentum at a level not seen in several months.  To me this definitely gives this upward movement bona fides that it didn't have before.

I have a lot more to say about the MACD and MACD-H that I'll be discussing in future posts. 

Meanwhile, enjoy the BREAKOUT!!!

Futures are down some this morning as those companies reporting so far this morning have been pretty disappointing compared to the Goldman Sachs blowout  last week (we're moving out of the quarterly reports of those companies that got lots of government money and into the ranks of those facing the economic travails on their own without the taxpayer largesse).

The opening is important because a lower open will confirm the reversal of the HANGING MAN Candlestick signal that I discussed last night.  Yesterday's open was just shy of 852 - an open below that, and a down day, will indicate the start of a downtrend.

To top things off, todays market action coincides wth the occurence of the longest solar eclipse of the century (only visible in Asia, sorry).

I'm much more interested in technical analysis and chart patterns than astrology, but there's plenty o'folks, some very succsessful, such as the famous W.D. Gann, who believe that there is a direct connection, and that many key market reversals directly coincide with eclipses.  Do a search on "teh Google" and you'll find plenty of hits discussing this.  (Did you know that last Sept. 15, the day that Lehman Bros. went down and took the market with it, causing the Big Panic, was also the day of a lunar eclipse?)

I'm not sure that I believe that stuff, but, the fact of the matter is that we have 2 strong reversal patterns setting up and staring us in the face, today's the potential trigger day, and it just happens to be the day of a big solar eclipse.  (cue spooky music)

Forewarned is forearmed, as they say.  Absent an up day today, I wouldn't own anything long going forward from here until I see how this plays out.

First, the good news - the S&P hit a new 2009 intraday high right at the open, taking out  the June intraday high by a skooch.  But while the bulls were enjoying the fireworks and the hoopla, things took a sharp turn-around before recovering by the end of the day for a new 2009 closing high.   But that drop as soon as it took out the intraday high - almost like a scared little girl - has  potentially put things in great jeopardy..  which brings us to our other 2 technical points.

Here's the chart:

 S&P 500 - Daily Chart - 2 Months

Those who know and love Japanese Candlesticks should automatically recognize today's price action as forming the dreaded HANGING MAN - a bearish reversal signal that forms at the top of an uptrend.

For those still unfamiliar with the Candlesticks, the way it is read is - because the body is clear, you know that it is an up day, and therefore the lower horizontal line forming the body is the open, the top horizontal line is the close, and the wicks at either end are the high and the low.  In the case of today, it opened just above yesterday's close, went up, then went way down and then came back up again to close above the open.

Here's what the good folks at StockCharts.com have to say about the HANGING MAN:

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.

They even provide a nice picture:

So we've had an advance, and we hit a resistance level (956).   And like many Candlestick signals, the HANGING MAN requires confirmation by the next day's price action to confirm the trend reversal - preferably an open below today's open of 952 - and heading south from there (like in the picture).

And if that does happen, then we will have our third technical goodie - also a reversal pattern - the psychologically devastating DOUBLE TOP which will form because we hit resistance at 856 in June and now again in July.   There is a long uptrend.  The bulls meet resistance and fall back and regroup, and then mount another strong challenge only to hit a brick wall at the same level again.  Often when this happens, the bulls quit the field in disgust and the bears take over completely.

So the fact that the S&P hit that new high today but then immediately dropped back sharply definitely puts the current uptrend in serious difficulty and may prove to be the stake through the heart of the March rally that wouldn't die. 

If the open and the price action on Wednesday are up, then a bullet has been dodged (which is still a reminder that this uptrend isn't invincable regardless of the new highs).  But if the open and the price action is down, there are 2 major reversal patterns that are in position to play out bigtime and the bears will be out.

Bottom line - Wednesday, especially the open, is do or die for the bulls.

Futures are up and looking strong.  Since this is the earnings season and those companies set to report today are expected to bring in good earnings reports (albeit on a very low bar and with much lower revenues than, say, a year ago), it looks like today could be another up day in the markets.

The S&P closed yesterday at 951, a new 2009 closing high, and within easy distance of the 2009 intraday high of 956.

The Dow is lagging the S&P as far as these milestones, so I will focus on the Dow here.

Dow 30 - Daily Chart - 7 Months

First off, the Dow crossed its 200ma yesterday and deserves congratulations (Congrats, Dow!)  The Dow closed yesterday at 8848 - but the 2009 high (set back in January 6) of 9088 is still a bit of a distance away.

Here's a close up chart

 Dow 30 - Daily Chart - 2 Months

2 observations:

- The high prices in this recent upturn is not being matched by high volume.   One would think that if the big boys thought that this was the the start of something meaningful, everybody would try and get in while prices were still relatively cheaper now than they would be expected to be down the road.  Instead, average volume (horizontal red line in the bottom section of the chart) is declining.  Not very bullish, is it?  A general market rule is that strong price movements should be accompanied by strong volume to add validity- the big boys should be acting on what they think the price movement indicates wicll happen.  Lack of volume shows a lack of conviction.   If a stock price rises in a forest and no one buys into it does it reaselly matter?  So there will be those who will discount all of this positive movement of the past few weeks and months because it is unaccompanied by increasing volume.  On the other hand, all the big boys are probably at the beach with their familes...

- Look at the price bars for the past 6 trading days - all up days.  One thing I like about Japanese Candlesticks (once you get used to reading them) is that they very easily show price highs and lows compared to open and close.  The thing that strikes me about these 6 days is how the candlesticks show that the price closed very close to the high on each of those days.  That is an indication of strength - buyers aren't fading out as each day goes on - or rather, sellers aren't coming in.  This is very strong and bullish.  When I'm doing my daily screens of potential stocks to buy, one thing I look at as an indicator of strength is the close relative to the high - the closer the close is to the high, the stronger the upward movement is.  If a stock finishes at its high (on strong volume), to me that says that there were still buyers unsatisfied at the end of the day - and they will still be looking to buy in the morning.  Having this happen for several days in a row is a sign of strength.   However, I will temper this with the lack of volume issue - to me this isn't necessarily saying that the bulls are strong (if they were, this would be accompanied by the volume - those bulls like to stampede!) - but that right now at this point there isn't any bear strength - they all went to the beach with the big boys, I guess.  But light volume says that no one is getting excited and stepping in to buy - and no one is really getting concerned about being overbought and selling and locking profits.  Eventually, the up movement has to be accompanied by higher volume in order to continue. 

So these are 2 conflicting considerations - each day is strong price-wise, but weak volume-wise.   This adds to the general ambivilance that the other indicators that I watch have been signalling.  In the case of a nascent bull market, ambivilence is not necessarily a good thing.

Last week I pointed out that many charts were showing reversal signs, but that the announcement of the stress tests results provided an exogenous event that gave things a boost.  That boost may have run its course as the charts are signalling reversal again.

First, another brief lesson in Japanese Candlesticks. 

Here's a diagram showing how to read to the Candlesticks - I realize that I use the Candlesticks in most of the charts that I post, yet I haven't really done a good job at explaining how to read them - these are generally what the Candlesticks show - you have a "body" - either light colored if the day is an up day, with the open forming the low of the body and the close forming the high of the body - as well as a tail or wick extending from the body showing the high and the low - and if the day is a down day, the body will be black or dark, with the open forming the top of the body and the close forming the bottom of the body, again with tails or wicks indicating the high and the low. 

It should be intuitive, that the longer the body (the difference between the open and close), and the closer the body is to the high and the low, the stronger that day was as an up day or a down day. 

But think of the opposite - where there is a very small - or no - body on the candle.  The candle looks like a cross.  That should indicate that the trend is very weak.   The Japanese have a word for this  - "doji" - which signifies indecision.

Generally, when one sees a doji symbol after a long trend - either up or down - it is an indication that the trend has run it's course.  In an uptrend we expect to see a "long white candle" (using the terminology of the chart above) - the close is substantially higher than the open.  But in a doji situation, the stock opens, it goes up, it goes down, and then it closes right where it opens.  The bulls who had been running the show during the trend have reached a point where they don't have the strength to move upward anymore.  The bears haven't yet taken over to push the price downward, but the point is that the strength that has characterized the trend is broken and traders should prepare for a trend change.

I want to focus on a particular type of doji - called the gravestone doji:

The Gravestone is generally a reversal signal if it occurs at top of uptrend.  The market opened, the bulls pushed things higher - and then lost strength and the bears pushed back all the way back down to the area of the open.  Not what one would expect to see in an uptrend, no?

Now that we know what we're looking for, let's look at some charts:

 S&P 2 Day Chart - 2 Months

S&P 4 Day Chart - 4 Months

I hope you've noticed the circles that I drew on the charts and the point that I'm making - on several different time frames, the charts are signalling if not an outright reversal, at least a stall in the uptrend.  To me that says that the boost from the stress tests has run its course - the bulls are unable to sustain their further gains - if you are in a long position, caution is warranted from this point unless the bulls clearly take charge again.

Good luck

The official stress test results came out yesterday afternoon, and, as you can see, the futures responded in a very positive way, climbing through the night and erasing the losses from the down day yesterday.   The employment report at 8:30am this morning caused the futures to give back a little bit of the overnight gains, but it looks like the lifting of the cloud of uncertainty that has hung over the financial sector since last year is finally lifting and that will be the determinative factor in today's market rather than the employment report.

I spent a lot of time looking at charts last night - and if I was relying solely on a chart-reading and techincal analysis, I would have thought that we had reached a market peak and things were headed down.   But instead,  the stress test results should give things another boost in this uptrend that won't stop.

I want to diverge a little bit from my usual discussion and focus on the indices and the financial ETFs to give a short charting lesson on Japanese Candlesticks (a method of charting) that should illustrate what I mean about the market peak:

 This is a Japanese Candlestick price bar called a "hanging man" when it is at the top of an uptrend, and a "hammer" when it is at the bottom of a downtrend.  It generally indicates a reversal:

What happens is that the price opens (generally higher than the close the day before) represented by the top horizontal line in the price bar, it goes up higher, represented by the short "tail" above the open, then goes much lower (represented by the long "tail" dropping down), and the rallies to finish higher than the low, but not as high as the open.  

Think of momentum and the bulls vs. the bears - in an uptrend we expect the bulls to be in charge - price bars should show a higher high and a higher low.   What happens in the "hanging man" is that the bulls open higher, push the price up a little bit, and then totally lose strength and momentum, allowing the price to drop substantially.  By the end of the day, the bulls do rally and come back, pushing the price up off the low of the day, but are not strong enough to push the price back past the open price or into positive territory.

The significance of the "hanging man" is an illustration that, after a long uptrend where the bulls have been strong and in control, bullish power is weakening and the bears are awakening.

The "hanging man" pattern depends upon a confirmation of the next day's price action to complete the reversal signal - if the price the next day is down, the uptrend should be ended (likewise with a "hammer" at the bottom of a downtrend - if the price the next day opens upward, the downtrend can be considered ended.

So let's look at a chart.  I picked Apple because Apple has had a very nice price ride during this last uptrend:

Apple - Daily Chart - 2 Months

This chart basically shows the entire uptrend since Mar 6.  Very nice.  I've circled the "hanging man" that showed up on the chart on Wednesday (2d price bar from the right edge).   The reversal signal was confirmed by the price action yesterday when it opened lower and went down during the day (note - this didn't just show up on Apple - there were all sorts of reversal signals all over the market yesterday).  By all rights, anyone looking at this chart would interpret this as a sell signal and the end of the uptrend. 

But the big exogenous event of the stress test announcement completely blows this out of the water.  In the absence of these sort of events, the market (or at a minimum, Apple) should be headed downward - instead we are slated to continue upward.

As I mentioned yesterday, keep an eye on S&P 944 as the resistance area to watch on the way up - that is the high for the year from very early January.  It should act either as strong resistance and possibly reversal - but if it doesn't hold, could portend a new and very significant move upward.

Good luck.

I'm going to start off with the daily chart - and there's a lot going on here, so listen up:

 S&P 500 Daily Chart 3 Months

I realize not everyone reads charts or knows about Japanese Candlesticks (the method of illustrating the price bars - on an up day the lower horizontal line is the open, the upper the closed,  and you have your high and low.  The body is the area between the open and close and is clear on an up day.  On a down day the body is solid, the upper horizontal line is the open and the lower the close).  Today was a special day known as a "Doji" day - "doji" being the Japanese term for "indecision".  There's an open - it goes up a ways, it goes down a way, and it closes very near the open.

It generally symbolizes a change in direction - in this case, the mini-little bounce off of S&P 666 that we're enjoying (and pinning all sorts of enthusiasm on!).   Look back at the chart and there are several - nearly all either ended a strong uptrend or downtrend or otherwise ended and reversed momentum.  The psychology of it is that the bulls had momentum - they pushed the price up and couldn't hold it - the bears then pushed it down but they couldn't hold it either - and it ended up near the open and nobody really had the advantage of the day.

But since the trend was upward, that is now stopped.  It may reverse or it may just pause, maybe have yet another doji day while it makes up its mind, and then takes off again.

On the bullish side, the price broke through the downward price channel which had characterized price movement since the triangle was breached back in mid-February - so this downswing is now ended and I'm assuming an upward bias.  The 3-day chart changed direction also.

The S&P still needs to get past that 731 line (there's a gap waiting to be filled just above that, after all), but even if it does it then runs smack into the 741 Nov low line - which should be resistance going up.  A doji just when the uptrend is trying to gain momentum isn't the most auspicious of signs.  But so many indicators are still showing everything so oversold that its hard not to root for the uptrend, if only to work all that off.

One nice little chart feature today shows a cup and handle (blue circle) on the 15 minute chart (the inverted head-and-shoulders that I talked about yesterday is still intact, btw).  On the left-hand side is the pivot point at 724, which was matched and passed this morning at the open .  The rest of the day was spend forming a downward-sloping handle.  Next we should expect to see a breakout on heavy volume as it crosses that 724 pivot point again - but it may spend some time forming the handle, first - I wouldn't be surprised to see 710 revisited either.

S&P 500 15 Min Chart 10 Days

So the S&P finally broke through the Nov low on Friday - although not by enough to put all this "retest" business fully behind us yet (theoretically there is still the making of a nice double "W" shaped bottom in place if it bounces up from here).  The important business from Friday, though, in my opinion, is that after breaking through and then bouncing up off of the mid 730s in the morning, the bulls spent the rest of the day making a counter-attack, which then ultimately failed when they ran into 751.  What was a very strong support on the way down, looks to be what could be a very strong resistance going up.  In my mind, this confirmed that going down and breaking that Nov low on Friday was the real thing rather than just the short bounce of last Tuesday. 

And, after hitting 751, the bulls' spirit evaporated - things went straight down from there, broke through the original low of earlier in the morning and ended up very near the lows of the day.  If you go back and look at this past couple weeks "inverted head and shoulders" - the normally expected reversal breakout to the upside completely failed to get past the breakout point, but the chart has now successfully broken out in the other direction, past the level of the head.  The failure of the inverted head and shoulders which was supposed to be an upward reversal, as well as the confirmation that the last important support before the Nov low is now resistance, strongly indicates a continued move downward.

Perhaps we have now moved into a new stage where instead of bouncing between 780 and 750, the S&P will now bounce between 750 and ???  - or maybe this will be a whole new downward leg that will go a chunk before settling into its next shortterm consolidation.  

One thing we have learned for sure from the Friday action is that coming back up (and most assuredly it will come back up at some point) - the Nov retest line of 741 AND then the big support/resistance line of 751-752 HAVE to be breached before any upward move can be taken seriously.  We can file that away in the old database.

 S&P 500 - 15 Minute Chart 10 Days

Here's a chart showing intraday movement since the big S&P break below 800.  We spent 3 days in a range bounded by 800 and 780.  Then 5 days from 780 to 752 and now we are below the 752 line.

The chart shows a lot of up and down daily movement within the support/resistance range boundaries.  If one was jumping back and forth between the up and down ETFs, there would be a lot of back-and-forth action.  If one was keeping a very close eye on the support/resistance lines, and managed to make the successful switch each time, one could have made a lot of $$$. 

I posted a little while back about watching the 3-day chart for trend determination as it tends to wipe away a lot of the zigging and zagging and helps to keep an eye on the ultimate trend.  So lets take a look:

 S&P 500 - 3-Day Chart 4 Months

Compared to the intraday (or even the daily) chart, the 3 day is a model of clarity.  The downtrend never appears to be in doubt (very strictly, technically speaking, the high of the last bar does go higher than the high of the previous bar (the hammer).  This was a judgement call - the same action did not happen on the Dow, and there was never any follow through to the upside - it was the difference between 780 and 777 - basically stalled at the same resistance level.

So, going with my 3-day trend model, I never did get out of FAZ, even though at times my position was more than 30% down (and I was getting frantic phone calls and emails from my friends!).  The FAZ position should look a lot sweeter going forward.

One last note - check out the hammer.  That is normally a bottom reversal candlestick - but as in this case, not always.  When you see hammer, or almost any other candlestick indicating reversal, confirmation by the price action in the next candlestick is always required before taking action.  In this case, the next open after the hammer should have gapped or otherwise trended upward - when it didn't, that was evidence that the reversal predicted by the hammer didn't happen.  While candlestick reading can give some very impressive market signals, always wait for confirmation before acting upon them.