Last evening we penned this article on the series of eveningstar patterns that have marked recent highs in the Dow Jones Industrial average. It speculated that a fourth in a series of bearish tops was forming on the Dow daily chart. It was posted early this morning.
The market gapped lower at the open then began vacillating around the volume weighted average price (VWAP). Around 1:15 EST the index broke above a two hour downtrend line and began to rally.
Some G-20 reporting about potential progress in talks between the US and China started to leak and the market never looked back. The Dow closed up 199 points, near the high of the day, and well above the VWAP. The potential fourth eveningstar top in a row that we speculated about this morning, was negated.
A large down-day candle was required to complete the eveningstar pattern and obviously it did not form on the daily DJIA chart, in fact, just the opposite. A large white or up-day candle formed finishing just below the 50 day moving average.
We did include this caveat in this morning’s piece: Of course, when patterns become overly apparent they stop repeating.
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A particular bearish pattern has defined the last three highs on the Dow Jones Industrial average, and another may be forming again on the daily chart.
The early October high was a turning point for the market. It ended the intermediate term uptrend off the July low, and has been followed by nearly two months of volatile price action.
An eveningstar pattern formed at the October top. It is a three-day bearish reversal candle pattern that consists of a large up-day candle, followed by a narrow opening and closing range “doji” candle, and completed by a large down-day candle. The eveningstar represents a transition in trader sentiment from bullishness to bearishness.
The Dow’s early October eveningstar high was followed a sudden and sharp 6% drop, and then a 3% pop. The bounce only lasted a few days and ended with the formation of another eveningstar pattern. After this second eveningstar the industrial average dropped another 6% and the cycle began again.
The November high briefly penetrated the 26200 as it formed the second candle of an eveningstar top. After the third candle in the pattern formed, the Dow, once again, dropped a little over 6%.
Wednesday’s Powell rally formed a large white candle on the daily chart, but the market took a break on Thursday and closed right about where it opened creating a near perfect “doji” candle. So the first two elements of a fourth eveningstar pattern are now in place.
If a large down-day candle forms in the Friday session there will be a fifth eveningstar on the DJIA chart. Another 6% decline like there has been after previous eveningstars would take the average back below the 24000 level.
Of course, when patterns become overly apparent they stop repeating. But be aware of the possibility of another abrupt market reversal. The pattern may also be developing on the S&P 500 chart.
On Monday we posted an article entitled “This Is Where The Real Resistance Is On The S&P 500 Chart.”
In a matter of days the S&P has pierced through lower levels of lesser resistance and moved up to test an area we outlined in the article as key resistance. The top end of this zone is defined by the flat 200 day moving average currently at 2762.
The market was oversold and this recent bounce has picked up momentum. A break above the 200 day moving average before the week is out is certainly a possibility. But directly above the horizontal 200 day average is the declining 50 day moving average. If it is taken out then its a smooth run up to the 2820 level.
In both October and earlier this month eveningstar patterns have formed just below the 2820 level. An eveningstar is a bearish three-day reversal formation, often seen at market tops. It consists of a large up-day, a narrow opening and closing doji-day, and is completed by a large down-day. It represents a transition from bullishness to bearishness.
So, we have a market that was oversold and has bounced hard, picking up both positive price and money flow momentum, but approaching multiple levels of technical resistance.
Trending markets are relatively easy to trade. Choppy volatile markets are not.
It has been a volatile couple of months for Amazon (AMZN) shares. Still the price swings have all occurred under a declining trend line. And while Amazon has seen a substantial bounce off its November low and Wednesday’s Powell rally was impressive, the downtrend is still in place. What would it take to change that?
Here’s what we see on the Amazon daily chart.
The October high formed a double top along with the September high. During the first week of October, shares broke through their 50 day moving average, and they began a process of making lower highs and lower lows.
The overall high/low ranges expanded and in less than a month Amazon shares dropped 30% from their October intraday high to their November intraday low.
After making a new lower low last week the stock bounced hard and with the 6% rally on Wednesday, it is up 18% off the November low. Coincidentally, today’s close represents an 18% decline from its October high.
Price momentum and money flow is positive. Note the bullish divergence in the moving average convergence/divergence oscillator. Momentum and upside volume will be required to penetrate the zone of resistance just overhead.
The declining 50 day moving average at $1748 marks the top end of the zone, which includes the 200 day moving average at $1695 and the 50% Fibonacci retracement level (not shown) at $1725. A downtrend line drawn off key October/November highs, which is now acting as support, marks the bottom of the zone.
For the intermediate term downtrend to be officially over, Amazon must make new higher highs and higher lows. The first step is to break through the zone of resistance and close above the $1784 November high.
All that would require is another 6% pop like we saw today.
The iShares $ High Yield Corporate Bond ETF (HYG) is sitting on an important technical level.
The $83 level has been both support and resistance on the weekly chart going back to the middle of 2017. Since that time the price of HYG has oscillated around this center line.
As the next Federal Reserve statement on interest gets nearer the HYG has been under pressure. A December rate hike is the consensus opinion and that will impact high yield issues.
The decline in the price of HYG over the last two months is reflected in the readings of the momentum indicators. Moving average convergence/divergence and the relative strength index are both below their center lines and tracking lower.
The money flow readings are equally bearish. Chaikin money flow has crossed below its center line and the accumulation/distribution line has crossed below its 21 period moving average signal line. These readings along with the jump in overall volume suggest the HYG is seeing institutional selling. (This is a weekly chart so the last volume bar and money flow readings are not complete.)
The chart of the High Yield ETF looks fragile at best. Poised for a breakdown is the more likely takeaway.
We took a look at some areas of support and resistance S&P 500 chart last week. As it turned out we could have just focused on the support levels because the market was unable to mount any sort of move higher. Here is the analysis.
The S&P index finished the holiday shortened week at 2632 which is just below the October 2640 closing low.
This morning the futures suggest a strong open with the S&P up about 29 points to around 2658, and the DOW making a 250 point jump at the start of trading.
The 2670 to 2680 area is the first area of resistance we see on the S&P 500 daily chart. Above that would be the 2692 level and then a bit of a resistance vacuum until 2733, which was last week’s high.
If the market was able to sustain a move back up to 2733 and break through that level, then the real work begins. The zone delineated by last week’s high wicks at 2747 and the 200 day moving average, currently at 2760, should present strong resistance. In fact, the 50 day moving average is dropping and could become reinforcing resistance, in the process making a “death cross” below the 200 day average.
The bottom line of the analysis is that even with this morning’s strong open and supposing another 100 S&P points, the index is still not out of the woods.
Here’s our analysis of the West Texas Intermediate Crude Oil Continuous Contract (WTIC) weekly chart.
A large inverse head and shoulders base began forming in late 2015 and was completed in November 2016. The neckline was situated in the $51 area and that pattern resistance was broken at the end of 2016.
The breakout failed and the price of crude oil slid back down. In July 2017 it retested right shoulder support at $42. It was a successful test which initiated the start of a 15 month uptrend. That move ended last month and completed the targeted measured move of the inverse head and shoulders pattern.
Crude oil prices have since collapsed, falling 30% from their $76.90 October high to Tuesday’s $53.43 close. The drop broke through several key technical support levels.
An uptrend line drawn off the 2016 and 2017 lows currently intersecting the $57 area and horizontal support going back to the early 2017 highs formed a key zone of support. This triangle of technical support was broken in Tuesday’s session (reminder: this is a weekly chart and the last candle is not fully matured). There is something of a support vacuum below this area.
The next major level of horizontal support is not until the $42 level. This level was the bottom of the inverse head and shoulders right shoulder and the area that acted as the 2017 low. There are minor support levels at $50 and $46.55 which should slow down the rate of any further decline or potentially contain a greater loss.
From CNBC this morning:
Jim Grant, editor and founder of Grant’s Interest Rate Observer, discusses whether the Fed might slow its pace of interest rate hikes as market volatility continues to hit U.S. stocks.
The nearby levels of support on the daily S&P 500 chart are becoming fewer and farther between. The futures indicate today’s open will take out the November low.
There is a bit of a support vacuum below that level until the 2640 October closing low.
Below that level is the October intraday low at 2603 and then the yearly closing low area of 2580.
We are getting about 100 S&P points ahead of ourselves, but this is what the index will have to contend with when it comes to support levels.
The Russell 2000 chart is the first of the major index charts to experience a death cross. This is when the 50 day moving average crosses below the 200 day moving average. It can signal a major shift in the momentum of a stock from uptrend to downtrend. The NASDAQ Composite Index is close to a D-cross of its own.
The last time these closely watched moving averages crossed on the daily Russell chart was in May 2016, two and a half years ago. Then it wasn’t a death cross, it was the reverse crossover or a gold cross, and it did signal the start of a major uptrend in the index.
Death or gold crosses are not always reliable indications of trend change. They initially reflect losses or gains already booked, and require longer periods of follow-through for confirmation.