Commentary:
Scanning
the intraday charts of the major market averages, prices exhibited patterns
yesterday that may have left more than a few traders scratching their heads. An
initial selloff coinciding with the first reversal period, gave us a tradeable
move to the downside as the Dow, S&P 500, and Nasdaq all violated Tuesday’s
lows and moved sharply lower. Given that Tuesday’s action left some narrow range
doji type bars on the dailies of the major indices, odds would favor a trending
day down after violating the lows of those narrow range reversal bars. This was
not to be the case, as buyers stepped in late in the day and brought the market
back to its highs near the open. The chart below analyzes what happened
yesterday from the technical perspective.
The chart above is a 15 minute intraday snapshot of the $SPX or S&P
500 index. The chart shows price action for the last two and a half trading
days. The section with the annotations is yesterdays chart, but we have extended
the chart to the left a bit to show the previous 2 days as well for purposes of
analysis.
On the chart above I have labeled 3 key technical events which
happened during the reversal. Firstly, notice that the selloff was stopped dead
in its tracks by the 200 period moving average. This moving average is extremely
powerful on any timeframe, including intraday. The ensuing chop to the right led
to a technical formation known as a bear flag. A bear flag is created when
prices move straight downward (creating the “pole”), and then consolidate at the
lower end of the selloff (creating the “flag”). It is a basic tenet of technical
analysis that when a flag pattern is fully formed, prices should follow through
and go in the direction of the initial move. This is believed to be so because
by the basic nature of the bear flag pattern, buying pressure is so weak that
prices can’t make any noticeable bounce higher after the initial leg down,
thereby creating the “flag”.
As we can see from the chart, the flag
pattern failed as annotated by the number 2. Up until this point the flag would
still be expected to follow through as it is often the “catching up” of the 20
MA (green line) on 15 minute charts that is the catalyst for prices to continue
in the direction of the trend. Notice how at point 2 on the chart, prices break
upwards and actually violate the 20 MA to the upside. At this point some bears
are trapped, and the market breaks its intraday downtrend (annotated by the
black trendline across the top) and continues higher, at point 3.
So,
where does this leave us in the “big picture”? This price action of the last 2
days has left what we commonly refer to as “opposing tails” on the daily charts.
Opposing tails occur when shadows of candles protrude in opposite directions.
This phenomenon is relatively rare (especially on dailies), and points to
extreme indecision in the markets. Below are charts of the Dow and the Nasdaq
Composite on daily timeframes, clearly illustrating this anomaly. The black
circles show the 2 candles formed on Tuesday and Wednesday.
After hours yesterday, the market continued its afternoon
ascent as Cisco Systems (CSCO) reported better than expected earnings and moved
up sharply on ECN’s after the close. Although not the powerhouse that it once
was during the internet mania of 1999-2000, a good report from CSCO does have
the power to move the markets. Unfortunately there seems to be a good deal of
resistance overhead as the market has made a few failed breakouts to new 52 week
highs as of late. Although there are many possible reasons for this, it is
usually the technical perspective that gives the true answer. With that in mind,
I leave you with one last chart which should illustrate what we have ahead of us
“going forward” as the bulls march onward. Although longer timeframes are known
to be more accurate for determining the true nature of a trend, most traders
ignore charts other than intradays and dailies. Below is a chart of the Dow
Jones Industrial Average on the monthly timeframe………
Although we don’t dispute the strength of the markets in the near term,
the above chart is just a “heads up” as to what may lay around the corner. The
10,000 level in Dow, which we are fast approaching, is not only a psychological
barrier but may be a technical impedance as well, as the prior support lows of
1999 to 2001 will now act as resistance.
Today’s watch list:
We are currently
still long 1/2 position of OIH which we will be managing today. Will send an
e-mail alert if/when we spot any other entries. We would like to see a clear
break to new 52 week highs before buying the broad market or any sectors here.
Unfortunately any such break would put us at the 10,000 level on the Dow and we
expect there to be a lot of indecision as this very important technical level is
breached. You would not be doing yourself a disservice to stay out of the broad
market until this area of indecision resolves itself.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (ETF Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG Position Sizing Model.
Closed Positions:
- SMH short (full postion from November 5th) –
shorted 42.88, covered
43.40, points = (0.52), net P/L = ($161)
Open
Positions:
- OIH long (Half position from October 30th) –
bought 54.70, new stop at
54.50, unrealized points = +1.02, unrealized P/L = + $51
Notes:
OIH is still holding strong. The oil
services index ($OSX) showed relative strength to the broad market yesterday and
closed near its highs. We will continue to trail our stop higher as necessary. SMH short triggered yesterday morning, but was stopped out when market reversed in afternoon.
Edited by Deron Wagner,
MTG Founder and President