Small doji stars or candles with narrow opening and closing ranges formed on the DJIA, S&P 500 and NASDAQ composite charts and we know these reflect indecision and sometimes form near reversal points. The more troubling technical development, however, is the reversion on the Russell 2000 chart. It is not critical that small caps lead a rally, the larger technology stocks have taken up that role, but you don’t want to see them divert the way they have over the last several days.
The S&P 500 index remains in a channel consolidation. The range compression can be seen on the Bollinger Bandwidth indicator at the bottom of the chart. Volume is about average but positive money flow has dropped off, and the MacD is in slight bearish divergence. These are all fairly normal technical indications during a consolidation phase, but remember the direction of a potential breakout, while expected to be in the direction of the long term trend, has not been determined and will require confirmation on this timeframe.
I was very pleased to be invited by Jim Cramer to be on Mad Money to kick-off “Chart Week” last Monday. It was a great experience.
We talked about the Facebook (FB) chart and how it was in a primary uptrend and looked poised to move even higher over the short term. That day the stock had broken out of a flag pattern and was trading around $90.00, but the pattern projected a target to the $95.00 level, an additional $5.00 or another 5.5% in the near term. Surprisingly, that number was hit four days later on Friday, a bit sooner than I expected to be honest.
Thanks again, to Jim and his incredible staff.
What’s happened with the markets since I decided to take some time off for my first vacation in about five years? The answer is price-wise not much, but price action-wise, quite a bit. The major indices are back to levels where I left them but it has been a volatile ride, with the S&P 500 index and the DJIA first dropping precipitously and taking out their 200 day moving averages, then experiencing a frenetic week of consolidation, only to come roaring back to near or just slightly above their 50 day moving averages. Is this latest move sustainable? It very well could be, as a bullish morningstar reversal pattern formed into the close of last week. This three-day formation is made up of a large dark bearish candle, followed by a narrow opening and closing range “doji” candle, and completed by a large white bullish candle. It represents a transition from bearishness to bullishness, and is usually seen at important lows. Today’s move is confirming action, but of course there could be another period of consolidation before the indices continue to advance, and that would probably be healthier than a “V” shaped bounce. I’ll be monitoring the situation and posting intermittently during this last week of rest and relaxation.
Those long tailed candles that formed in yesterday’s volatile session do not look like the kind of hammer candles that result in consolidation and stable bases. They look like bearish “hanging man” candles, those with long lower shadows or tails and narrow opening and closing ranges situated at the upper end of their overal range. The longer the lower shadow the more significant the candle, but it is not by itself a reliable indication.
The PowerShares Multi-Sector Commodity Trust Agricultural Fund (DBA) has been in steady decline since 2011, interspersed with sharp temporary bounces, as seen in 2012 and 2014. The technicals are currently signaling the potential for another such oscillation, with the MacD making a bullish crossover in conjunction with the relative strength index and Chaikin money flow crossing above their centerlines.
It looked like a perfect time and place for a reversal move. A sharp sell-off in the S&P 500 index was halted at the 200 day moving average and a bullish morningstar scenario began to unfold. Then the Greece issue became more complicated and the markets were unable to maintain their modest momentum. At this point in today’s session the S&P has broken below its 200 day moving average and the March low looks like the next level of support. The Nasdaq Composite index took out the uptrend line of an intermedite term rising trading channel, and the pattern breakdown projects a test of its 200 day moving average.
(Meanwhile, I’m still on vacation but the market is making it difficult to relax.)
The S&P 500 Index is near a key Fibonacci time period in the time zone sequence measured off the 2009 low, and is testing its 200 day moving average. Monday’s large dark candle which was followed by Tuesday’s narrow opening and closing range doji candle, sets up the possibility of another morningstar reversal formation like we saw in March and again earlier this month. All that is missing is a large white or up day candle to complete the three day bullish reversal transition pattern. That may seem like a tall order but with this market anything is possible.