Because I remain in 100% cash, I am constantly reevaluating my strategy for the sake of thoroughness. In my quest to look for reasons to get involved on the long side, however, I have come across several problematic monthly charts that I would like to share with you. The charts seen below all involve bearish reversal patterns, particularly when viewed through the lens of Japanese candlestick charting. The two patterns I would like to discuss are the shooting star and bearish engulfing reversals.
The “shooting star” is a type of reversal pattern that is made up of one candlestick with a small “body,” a relatively long upper shadow and a minimal or absent lower shadow. Basically, the shooting star illustrates that the buyers have exhausted themselves via a blow off top. The sellers then aggressively move in and push price down to where it was at the beginning of the month (on a monthly chart). When seen after a steep uptrend, the shooting star should be taken very seriously. A sharp gap down immediately following the shooting star helps to confirm the reversal’s validity.
The bearish engulfing pattern can been seen over two candlesticks, the first being white (or green, where the bulls won the month on a monthly chart) and the second one being black (or red, where the bears won the month with price finishing lower). The main idea is that the red candle is bigger than the green one, and thus “engulfs” it. When seen after an uptrend, this pattern signifies that the bears were able to convincingly seize control of the price action away from the bulls. The bigger the red candle is, the stronger the reversal. As with the shooting star, the buyers had made a higher high in the beginning of the red candle, only to see sellers present themselves in a meaningful way and, unlike the shooting star, actually push price all the way below the low point of the green candle. Also, as with the shooting star. follow through to the downside is key.
I have denoted the patterns in the following monthly charts, which include: $SPY, $COMPQX, $XLE. $XLI., $CREE, $VECO, $GMCR.
Note that there are still several arguments the bulls can point to as reasons to be optimistic, such as the fact that the hammer on the $SPX daily chart from last week is still valid. Also, the small caps and transportation stocks have shown relative strength, and they are widely seen as leading/confirming indicators. Moreover, after an historically weak month of May in terms of broad market performance, it is tough for me to become aggressively short right here, right now.
Thus, despite the troubling monthly charts seen below, I prefer cash at the moment.
Chess,
Very interesting and you clarified my understanding of shooting stars and engulfing patterns.
I’m currently in cash also and looking at many leaders while I wait for a follow through confirmation from the major indexes.
In the meantime, I’m thinking the short term strategy until breadth improves more might be to take small positions and short on bounces.
Good job of keeping an objective frame of mind, Hawaii.
Good spot on XLI and XLE – because I’ve been in tuned with them from the daily side, it truly shows a lot to me when you look even deeper into the chart through the weekly. XLI is pretty ugly, and that volume is nasty – main thing I noticed about XLI in the month of May.
Solid post as always bro – enjoy your three day weekend!
Thanks Moose–you should pull a Dick Bove and go to the Jersey Shore to look at all of the “generational bottoms.”
June 19-26 😉 I’ll be in OCMD though… Good enough!!
Agreud on your findings, but I think we get one more blow off top… maybe to 1120-25 or so.
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Indued. An early Fall 2007 double top scenario would piss off every bear from here to Yellowstone.
Chess, pull up your skirt and get long
you’ve already missed a 3% up day
there is a clear stop a few pts below if we are wrong which I don’t think we are
when the true top comes there will be obvious divergences
I don’t daytrade and I don’t wear skirts. The 3% up day was on weak volume and followed up by a selloff the next day.
If “we” want to go long, then you can. Count me out for now.
I have saved readers of my work a lot of money by spotting the megaphone and subsequent diamond top back in mid April. You can check the archives of the KoPG to verify. That, my friend, takes more balls than going full degenerate long in the face of classic bear market action.
I hope this helps.
ChessNwine is right.
I was very cautious a couple weeks ago when he mentioned the bearish megaphone pattern.
I wouldn’t go long at this level. The rallies with low volume were so uninspiring. There’s no way I”m invest in a market with broken charts. With that said, I’m always in 100% cash by the end of the day.
BTW, excellent chart and keep up the good work ChessNwine!
TheLoc,
Chess practices the science and art of T.A., which has been elucidated in “Monthly Charts From Hell.”
Should you feel the need to differ, please break down your rationale and the reasoning behind it so that we may all benefit.
Would you like to see the most perfect Shooting Star? Look at the Dow, daily chart. Focus on April 26. It is textbook.
Very ominous there-good eye Scotty, as usual.
FWIW … I post on (and subscribe to) StockFetcher !
I have been posting/venting/ranting … FOR WEEKS … on a thread there that I created (Tails, ODRs & Rocdiv … OH MY !!!) about BOTH the April 26th “Top Tail” on the Daily Chart of ALL the Major Index ETFs … as well as the April Monthly “Top Tail” on the SPY (etc…). (I can provide a link if requested)
Nice to see (some of) the IBC bloggers finally recognizing … what the charts have been screaming for weeks !
I am encouraged … I think !!!
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I think all of the bloggers here are top shelf, Alf. You put iBC up against Pennystocking or any other third tier toilet website and we win.
…I think all of the bloggers here are top shelf …
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Well … I’m sure they are ALL “top shelf” human beings …and THAT speaks volumes !
That DOES NOT however neccessarily translate into “blogging prowess” ! fwiw
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For example … I’d sooner take an asss whippin’ from “Butterbean” … than be forced to read ANYTHING from Woodshedder !
Now …that doen’t mean I don’t respect the obvious work and effort he puts into his trading and … well …whatever he does … but … jeeez … gimme a fucking break !!!
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But I digress … glad to see a few of you “SEEING” the Market … FINALLY !!!
Bro are you serious? Woodshedder’s Power Dip System has had phenomenal results. He returned something like 70%.
…BTW … not familiar with “Pennystocking” (never HEARD of it) …
AND … to even implicitly compare … IBC to a “third tier toilet website” … prolly caused a dramatic SPIKE … in Senor Tropicana’s bloodpressure !!!
Just sayin’ !!!
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That was not the implication. Stop trying to be a troublemaker.
Congrats Chess!
Troublemakers are a sign that you’ve made it to the big leagues 🙂
chess, you were also skeptic about buying the Feb bottom
the risk reward buying at this point favors buying the dip
if I may respectfully say, tech analysis on SPY is for homos. use SPX instead
also I would argue for the shooting star to be any sort of long term trend change it would also require a lot of volume
treat the market like the whore she is. hit and quit my boy
I gave long setups day after day, week after week in February, March and April. I was also constantly harping on the 150 day moving average as a key reference point, when no one else was talking about it, and that happened to be where we found support.
Also, I use SPX every single day in my market wrap up instead of the SPY. But, guys like Brian Shannon use SPY every single day, and he is far from a homo.
If you want to buy the dip, hey maybe you are right. it simply is not my style to bottom pick. I trade stocks in confirmed trends. Right now, many charts are a mess.
Well said sir
The chop zone brought to you by Ron Popeil and GS. Try their new nut cracker Loch. It is sure to please. It slices. It dices. It chops those nugets into Julienne fries. Just sit right up here on the cutting board and trade all in. It’s surely the correct move now.
Awesome post once again.
FWIW, I think the $TSX will test the 50 again, which will pretty much bring it to the descending resistance line, before it starts taking another nasty tumble.
Any thoughts on it?
It could rally up and test the 50, but you are right that the chart looks menacing. I am bearish/neutral on the TSX for the foreseeable future barring any kind of high volume buying by the bulls.
Thanks Chess, much appreciated.
My pleasure, Kenai. Thanks for reading.
…lighten up … “chessNwine” !!!
What … I get nutin’ for my obscure “Butterbean” reference ?
Man … tough crowd !!!
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Certainly not trying to be a trouble maker here !!! fwiw
Hey …you’re good … you’re just … LATE !!!
And …I understand …
You have a responsibility to your “readers” … to err on the side of caution !!!
I get it !!!
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Unfortunately … inherently … many bloggers are a slave to their last post !
Listen up … cause I am NOT directing this at YOU … specifically !!!
One of the things that I really like about Fly (aside from his ability to write and turn a mean phrase) … is his openness to …TURNING ON A DIME … WRT … Long or Short Market exposure !!!
This fucker (with all due respect) will “TURN ON A DIME” … sometimes more than once in a single day !
Sometimes I laugh … HELL …I laugh alot !!!
BUT … I always marvel at his openness to completely “change his stripes” … as it were !!!
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You’re doing a great job here !
Doesn’t mean everything you post is an original thought !
Most seasoned technicians (as I consider myself to be) SEE what you SEE … and often … before you SEE it !!! Or, at least … before you POST it ! And that’s OKAY !
JUST POST !!!
YOU are doing a great job !!!
BUT … you are NOT suddenly … just because you have an IBC tab … NOSTRADAMUS !!!
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Love Ya Man … SERIOUSLY !!!
Ok, Turn On A dime
You try and get the entire 99% and I’ll thankfully take the middle 80%. You have a large risk appetite.Is that working? Seriously!
Okay … note to self !
Don’t post on the internets after a day of drinking copious amounts of beer on the boat in the Texas heat !
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Chess- great stuff…..the context is key..these guys are not doing apples to apples comps..If you only play confirmed trends, then your charts should only be measured against other confirmed trends chartists! And you rock..that you are challenged on your trading style is another discussion entirely…some people just like to talk their book I guess. everybody wants agreement. everybody wants to think they are right and must make everyone else wrong.
My personal feeling is that the bears have a lot more going for their side, at the current juncture. Up moves can’t get any fuel behind them, we’ve traded under the 200 day for more than just a couple days, etc. I think it pays to dip ones toe in to some extent, because while waiting for confirmation is always great, there’s no law saying that we always have to have these long protracted one-way moves in the market. I think that traders will need to adjust to more chop, which means accepting shorter targets, both in price move & duration.
Good stuff. Thanks.