Trading Beginners

Breaking news development… The Dow Jones Industrial Average as well as the SP500 Index are currently as the time of this posting showing another potential bearish implication candlestick formation.

The formation is the bearish hanging man candlestick.  This candlestick looks like a bullish hammer, has a small body shape and a tail that is at least two times the size of the body.  In addition, the upper shadow is preferably minimal or non existent.

The Dow Jones Industrial Average is the index that is currently showing the best likeness of this potentially bearish candlestick.  The SP500 also currently has one somewhat less ideal than the Dow, and the other indices do not have one at all.

This candlestick can at first glance look quite bullish but the issue is where it appears in the trend.  If it appears after a severe decline then it is a bullish hammer, but if it appears after a straight up move like we recently had then the bias is bearish interpretation.

It is significant in my opinion that this potentially bearish hanging man candlestick is forming 4 days after we had a gravestone doji candlestick on the DJIA and a couple other indices.

The hanging man candlestick is useless without confirmation.  And I should not that the final formation of this candlestick is not done yet.  It may change enough by the close today to make it invalid.  But at least for now it is keeping the proper shape.

What about Bearish Confirmation ?

Bearish confirmation of this candlestick would occur if and only if tomorrow, the last trading day of this week we see either:

1. A gap down in the SP500 (The DJIA does not gap) below today’s real body or below today’s entire candlestick.
2. A bearish black body closing candlestick that closes below today’s real body or engulfs today’s body or entire candlestick.

Hanging man candlesticks do not guarantee a huge change in trend.  A huge change in trend could be occurring, however the proper interpretation is that they imply either a change in trend or just a pause in the current trend.

If I am correct, and the hanging man candlestick is confirmed tomorrow, April 1st, 2010, then it would be very very important for the Dow Jones Industrial Average to hold 10,730 (and the corresponding levels on the SP500).

If it does not hold that level then we could be dealing with a dangerous 2B sell signal similar to the 2007 stock market top.

Everything I am looking at right now in terms of candlesticks, astro, and a few other factors says we are approaching a violent change in trend.

The jobs report is out on Friday but the market will be closed all day.  One would think with all the census jobs we will get a blowout number and the bulls will be gapping the market up 400 points out of this range?

I would be the last one to say that is impossible, but right now in terms of the probable, the market is speaking to me and it is telling me possible violent downside action is coming and the bulls will be tested and put the challenge of trying to defend the 10730 level on the Dow Jones Industrial Average and corresponding levels on the other indices.

A gap up and close up above the hanging man candlestick would invalidate this bearish signal and simply say that the only signal it was giving was a pause signal, not a change in trend.

After a stock has had a significant advance it usually never pays in my experience to hold on after you see a price bar reversal that resembles a shooting star candle stick.

There are specific definitions of exactly how a shooting star candle stick should look.  But in my experience, any price bar that shows a large intra day advance above the days previous high and then closes back under that high and near the bottom of the range is a very bearish short term signal for me.

It seems like almost every time I have seen one of these price bars the next day or few days price action has been very weak and down.

Sometimes these reversal bars can lead to really significant price destruction for a long time.  It all depends in what phase of the trading cycle a stock is in.  But regardless of the phase it is in, most of the time it is prudent to bail out and seek safer waters.

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You remember in a previous post ( you can see it in the related posts section at the bottom of this post) I was talking about how I believed SRSR would likely get an ‘automatic rally’ ?

Over the course of the last 4 trading days that is exactly what happened.

In my previous post I was trying to figure out whether or not .081 was to be the final low or not.  I guessed that it would be.  As it turns out .081 was not the final low.  SRSR went into the low .06’s which was a more solid area of support before the automatic rally.

The automatic rally shot up over 100% from the lows and displayed in true fashion how amazing this type of setup can be.  The hard part is figuring out where the final low is.  But even if you had entered at .081, there was still a sizable profit to be had, but it would have required a draw down all the way to .062 before resuming higher.

So it is somewhat dangerous to play these automatic rallies but they are powerful in the aspect that there is tremendous volatility.  The best automatic rallies I have seen are the ones that occur after a massive price collapse from a very strong and long uptrending arcing blow off type uptrend that peaks into a climax.

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I started a new category here called ‘Trading Psychology’ so that I can occasionally talk about aspects of trading that are more intangible. I can tell you with zero doubt that one of the most difficult aspects of trading that has challenged me time and time again is the tendency towards over trading when there really are not any good trades to be had.

That’s where patience comes in, and that is why I posted a picture of a cheetah in this post waiting in the tall grasses of (Africa?) to scope out its target and see if if can find something interesting to chase.  I don’t know how long cheetahs wait in the fields before they scope out a target and attack.  But I doubt they just run into the field paws flapping everywhere and then just chase and jump on the next moving zebra over the hill. 

They take their time, they scope out a target, they are extremely patient.  Heck most animals and pets I know of are very patient.  Certainly not all of them are, but I would say most of them are.  So it is not just cheetahs.

So most traders can probably learn a lot from the cheetah and most other animals and pets.  Try to avoid rushing to find a trade during the trading day, and then in panicky fashion buying something because it ‘looks good’.

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Yesterday I downloaded from an online database the entire full list of all ETFS and then converted their symbols so that they could be displayed in my charting program.  I am not too sure why I did not do this before because I can tell you with zero doubt that ETS are really a superb trading and investing vehicle.

You’ve got leverage, liquidity, choice, flexibility, low fees.  I mean what more could you ask for ? Why even bother with stocks or futures or anything else for that matter when you have ETFS?  It is something to think about for sure.  Me personally I like to have as many options as possible, because you never really know where a good trading setup might come from.  Yes there could be a great ETF trading setup, but there could also be a great setup in a penny stock, a blue chip, a Canadian stock, many places!

But I can tell you after scanning through 415 ETF charts one by one in my charting program something occurred to me.  A lot of their patterns look the same and…

95% of them follow what the SP500 does!

It’s true.  Most of them bottomed in March 2009 and most of them have been moving up since then.  Some stronger than others, but their primary direction has been in line with the SP500.  Perhaps this is an obvious point since many ETFS contain sector component stocks which also trade on the SP500.  And some of them just follow specific sectors.  Even commodity ETFS followed the SP500 as well.

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