Monday Looks like an Important Trend Change Day

The tape has been very slow the last several days.  The sp500 finished the week Friday by printing a near perfect doji candlestick right at the top of the all important resistance range.  Doji’s tend to be more reliable at pinpointing tops as opposed to bottoms.  The doji we printed 9/17/2010 in the sp500 is so far unconfirmed.

Looking at some of the other indices I make the following observations:

  • The Dow Jones Industrial Average also printed an unconfirmed near perfect doji candlestick
  • The Nasdaq Composite printed an ideal looking ‘hanging man’ candlestick, also unconfirmed.
  • The BKX Banking Index has a 4 day minor down trend as opposed to the sideways to upward trend in other indices.
  • NYSE composite index shows a doji 9/17/2010
  • The Russell 2000 does not show anything conclusive, just a sideways rectangle formation (previous 5 days).  Last 3 days show small bottoming tails. However it is notable that since the April 2010 highs, the Russell is still plagued with a series of lower successive highs.  It has not as of yet been able to create a higher peak high yet.

The daily MACD histogram is showing bearish triple M’s on most indices, but unconfirmed on most.  The XLF has a confirmed MACD histogram sell.  I do also see that the SPY has a confirmed MACD histogram sell, but the actual sp500 does not.

The volume on the recent rally north has been nothing to write home about.  It has been tepid to say the least.

So here we sit at the top of the recent trading range with doji’s and hanging man candlesticks that are as of yet unconfirmed and MACD histogram setups that are somewhat confirmed on a few indices.

spy20100918

The market has not really spoken loudly as to its intentions.

A gap down on Monday and some type of follow through close down would confirm many of these doji reversals and hanging man candlesticks and also put more MACD histogram patterns into confirmed sells.

That is one scenario going into Monday of this week.

The other scenario rests on the the possible fact that there are many shorting the market right at the top of the current resistance range.  A much stronger shorting signal would be a topside initial breakout and then a complete reversal end of day that closes back within the range or even slightly down.  That would likely create what looks like a shooting star candlestick similar to what appeared on 6/21/2010.

The bullish interpretation is a gap and go Monday with a strong close higher above this resistance range.

It is a very tough call here right now.  I am tempted to say that the direction is on the short side of the market right at this resistance range, but the problem is that the market has not really spoken loudly at its true intentions.

I think it is key to wait for Monday’s action. 

A gap down Monday and close below 9/17/2010 candlestick lows on most indices would confirm the MACD histogram sell and confirm the dojis and hanging man candlesticks on others.  That would be a more ‘meaty’ sell signal in my opinion.  An even ‘meatier’ sell would be a break above the resistance range and then sell off at the close to close back under the range.

A repeat doji or small range bar would obviously just delay any decision.

So I am flipping the signal to short on 9/20/2010 if we get a gap down and/or close below the 9/17/2010 sp500 low.  If a shooting star candlestick forms and closes below the 9/17/2010 low then I would also flip the signal to short. A gap up higher and close higher would keep the long signal intact.

The McClellan summation index looks like it is starting to struggle higher right now even though the 5 and 10 day EMA are still in a bullish configuration.  There is also a down trend line that can be drawn from the April 2010 top to current time frame which shows the summation index is coming up on resistance.

It is typical for the market to make some type of low in October.  If we flip to bearish trend now, it will be key to see how much of a correction could develop into October as a clue for what the rest of the year holds.

Posted in Index Trading, SP500
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5 comments on “Monday Looks like an Important Trend Change Day
  1. Geoff says:

    your comments seem reasonable. looking strictly at charts, a move down seems the only course, but there is always a but.

    i suppose the market is hoping and expecting the Republicans to take over one or both houses of Congress and for “gridlock” to ensue. under normal times that might be construed as constructive for the markets, but this time, in these circumstances, i think the market will eventually have second thoughts. it may take the market a while to realize that with gridlock comes gridlock and the lack of cohesive, constructive response to another potential serious problem in the worldwide economies. unfortunately, the recovery in US is probably built on quick sand, and the Europe economies are rather reliant on demand from emerging markets.

    i think the overall trend is lower over the long term until such time as governments decide to try and inflate their way out of the situation. whenever that option becomes the clear option of choice and usage, than probably all hard assets will start escalating in value. . . . gold seeming to have gotten a head start. a signal of the usage of that choice might be a formal implementation of QE2, but might require firm / clear evidence of a problem (which might be a breakdown in the stock market). at that point or within months thereof, i would expect the stocks of large multinational companies to move up in price, perhaps in some sort of meltup.

    So, while it may take months from now, i suppose i would say the market eventually goes down rather significantly before going up even more significantly

    having spent a lot of time traveling and working in Brasil, i recall the dark years there with the rampant, mind boggling inflation, but the BOVESPA index is 5x or more what it was during that time.

  2. Ed says:

    A rounding island top on my 180 min SPY chart is an ominous signal.
    Monday will be a decisive day.
    A lot will depend on what Obama says or does not say regarding tax cuts on the CNBC program to be aired at 12 Noon EST

  3. Geoff says:

    well, i hope you both are right – – that Monday is a decisive day. . . . . if it is decisive, i would guess the odds strongly favor a down day. investor sentiment has widely been reported to have aggressively and quickly become more bullish (a potential contrary indicator).

    talking about a rounding top – – look at the chart of restaurant PFCB

  4. Tom Tom says:

    I can’t even get 180 minute charts but I will take your word for it… but I do not really see rounding top formation on the 60 minute chart.. I would think any tax cut would already be built into the market but I could be wrong…

  5. Tom says:

    If the Republicans sweep in November it would seem a very positive market reaction would occur. Because then you would have more pro business policies and also more gridlock which is maybe perfect for the market.

    Maybe we will really start to see some real inflation in 2011. Funny thing is that it has been talked about and predicted to occur since 2001 but we have never really seen as of yet a rampant out of control inflation except for when the oil price spiked and people started getting angry about high gas prices. I suspect that we will revisit that phase again down the road, maybe in 2011. Then the Fed will have to figure out how to raise rates quickly without damaging the market too much.

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