Monthly Archives: October 2015

The sell-off in the last two hours of trading created a dark candle on the daily S&P 500 index chart, and possibly the final component piece of an eveningstar bearish reversal formation. The eveningstar pattern consists of a large white candle, followed by a narrow opening and closing range “doji” candle and completed by a large dark candle. Today’s overall range was not large relative to Wednesday’s white candle, but the presumed message is similar, a transition from bullishness-to-bearishness. The broader market just finished its strongest month in four years, so, as is the case with all candle formations and technical patterns: confirmation is a requirement.

The momentum this month in the broader market has been powerful and has laid waste to several key resistance levels. In yesterday’s session the major averages were all up over one percent but the Russell 2000 index, the underperformer until now was the clear outperformer, with a gain of nearly three percent.

The daily chart of the Russell 2000 iShares (IWM) shows the ETF breaking out of the narrow consolidation range it had been trading in for the last few weeks, on volume that was 74% greater than the 50 day moving average of volume. It is important to the health of the rally that the small caps participate along with the broader indices.
It is also important, based on Dow Theory that the transports engage as well, and they are lagging at this point in time. The chart shows the Transportation Average ($TRAN) testing the bottom end of a small channel similar to the one on the Russell chart.

Also, keep an eye on the Germany iShares (EWG) ETF, it formed a narrow opening and closing range or doji star candle in yesterday’s session, which often suggests that the current action is under consideration, and these candles sometimes form at reversal points. The news this morning from Deutsche Bank that it is reducing its workforce by 35,000 and closing its operations ten countries is not getting the attention it should on CNBC.

The Russell 2000 index ($RUT) is pulling back today from a retest of resistance, action that closely resembles what we’re seeing in the Transportation average. Earlier in the week, I noted the morningstar pattern on the Russell weekly chart and suggested it was preparing to catch-up to the other major indices, all it had to do was break above resistance to set that dynamic in motion. Looking at the Russell 2000 iShares (IWM) ETF we see no attempt to traverse the resistance line, instead it reversed and is testing the support line of the narrow channel it has been trading in for about the last three weeks.