Earlier in the day today I started to write a posting here at BestOnlineTrades.com about how I was going to switch to a BOT Short Signal. But then it occurred to me that I had responded to a comment poster yesterday (JR) and wrote:
If we do not see that then the other possibility is that we trade down tomorrow and then reverse by end of day creating a bullish reversal hammer. I have seen this happen SO MANY times… we get a shooting star and then a bullish reversal hammer the next day.
Then I realized that maybe it would be a good idea for me to actually start taking my own advice so I can avoid excessive whipsaw signals.
I also wrote in yesterday’s post:
The high in April 2010 on the sp500 was 1219.80. If Wednesday’s trading action manages to hold above 1219.80, then I have to view that as a first sign that today’s intraday reversal was just a head fake and not necessarily a sign of a real reversal.
And this appears to be exactly what happened today. The market very reluctantly pressed down today towards the previous April 2010 high of 1219.80 and then bounced off of it like a basketball creating an end of day reversal hammer after yesterday’s shooting star reversal.
The occurrence of a reversal hammer the day after a shooting star reversal is an interesting candlestick pattern. I do not think it has an official candlestick pattern name, but I have seen it often enough that I think maybe it should have one. It essentially neutralizes the previous potential bearishness of the shooting star reversal.
Also, I should say that there is a slight nuance to these shooting star reversals when a market makes new highs that is very important in my opinion. There are actually two important aspects.
First is the length of the shooting star tail. Ideally you want to see a VERY long tail on the shooting star reversal to help the bearishness of the situation. This is a judgment call and comes with experience. I would have to describe yesterday’s shooting star reversal in the sp500 as not very potent in terms of its topping tail. It was not long enough. Ideally it would have been twice as long or even longer to give it much more actionable signal.
Secondly, when the shooting star candlestick completes and does not manage to close under the previous days close or low, then it somewhat tempers the potential bearishness.
It makes sense. Think about it. A VERY long topping tail that makes up the shooting star candlestick is much more effective because it is trapping many more traders and then extinguishing them all in the same day creating higher stakes.
Lastly I should point at that the reliability of shooting star reversals is much greater in bearish trends (bearish weekly and monthly MACD alignments as well as bearish moving average alignments) than it is during bullish trends.
It is quite fascinating that the market touched the 1219.80 level and then rejected it. The sp500 now looks like it putting the finishing touches on a small handle from the smaller cup and handle that started in early November 2010. So we seem to have a cup and handle within a cup and handle pattern.
Right now is actually a pretty low risk long entry point on this market in my opinion because one has clearly defined levels. Anything below 1219.80 should be considered bearish from here and anything above, bullish. The levels are clearly defined and I see room towards 1310 to 1410 on the sp500.
We could see a move higher into end of year, then some type of shakeout in early January 2011, then back off to the races as the year starts to roll on.
The end of year time frame is going to be interesting because it will create closing monthly, QUARTERLY and YEARLY time frames. The quarterly MACD is moving towards a bullish crossover as I write and as long as prices hold ground here or tread higher into end of year, it implies a quarterly MACD bullish crossover once we get into January 2011.
I see no reason to be bearish here. sp500 under 1219.80 is what needs to happen for any bearish case from this point onward.