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MARKET WRAP UP 07/01/10
For the eighth time in the past nine trading sessions, the S&P 500 ended lower than where it had closed the previous day. A morning gap down took us to 1010, before buyers finally summoned the intestinal fortitude to momentarily fight off the bears into the session’s choppy finale. With the S&P 500 finishing down 0.32% to 1027, the key index printed something akin to a bullish reversal candle.
The last time I talked about the bullish hammer candlestick was on May 25th of this year. As I noted then,
In Japanese candlestick terminology, a bullish hammer often signals a trend reversal. Above all else, the hammer (on a daily chart) shows that the price drops significantly from where it was at the opening bell, yet rallies back towards the end of the session up near the opening price level. Some key elements are: a prior bearish trend, little or no upper wick to the candle, and a small body at the top end of the hammer.
Beyond that description of a hammer, I also noted that a necessary factor is confirmation. In other words, seeing follow through from the bulls to the upside after the hammer has been printed is crucial to validating the reversal pattern. As we all know by now, that May 25th hammer on the S&P was good for a short lived long trade, that abruptly ended with the fierce selloff on June 4th. Although you would have made a short term profit had you bought the hammer, and then sold a few days later, one of the reasons why I believe that hammer eventually failed was because there was a lack of uniform hammers being printed on other indices and stocks across the board. This fact made it difficult for me to have much conviction in the days following the hammer.
First off, let us take a look at the updated and annotated daily chart of the S&P 500, seen below.
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Next, the $QQQQ ETF has been down ten days in a row (!), and printed a hammer today. Although there is a small wick on top, the gist is that the sellers seem to have exhausted themselves today (see below).
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The $IWM small cap ETF has a similar type of hammer to the $QQQQ and $SPX.
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I could run through all of the indices, sectors and issues, but a great many of them show similar types of candles. Though far from perfect hammers, they still need to be respected given the swoon we have seen. My analysis leads me to believe that the steep downtrend of the previous two weeks (and possibly the past two months as well) is poised to take a break in the form of a reflex rally. Accordingly, I allocated 40% of my capital to the long side today, as noted in an earlier post. Being a contrarian is not one of my hallmarks, but I do believe that taking on risk when I see an edge will always be a weapon in my arsenal. Whether this is a yearly bottom is anyone’s guess, and I have no interest in betting on something like that. In fact, I do not need to. A tradable temporary bottom is all that I think is worth betting on at this point.
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TOTAL PORTFOLIO:
EQUITIES: 40%
- LONG: 40% ($AAP $NR $NTAP $LULU $CRM)
CASH: 60%
nice moves today, sir!
ty
Thanks Duane.
Chess enlightening as always and comprende on follow through day. But do you give a reversal hammer more credibility if it bounces off a MA. ie crm, arun?
It should that sellers are backing off at a reference point, and buyers are coming in. Of course, confirmation is still key.
Thanks for reading.
I’m right behind you Chess though I am spread more among low beta and spec plays and never went to cash so I took a small drubbing the last three days:
BRKB (since 65)
RIG (since 45)
Added TM, TOT and GE today.
Looking at GOOG, GS and C on further weakness.
40% long
Great post as always…
Good plan Donnie. I like GOOG for a reversion to mean trade.
“A tradable temporary bottom is all that is worth betting on at this point.”
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Agree … totally !!!
That said … I covered ALL SHORTS today !!!
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Good stuff alf.
Thank you Chess! Always read and enjoy your posts..
Thanks for reading kohai.
Another factor in the weakness of the May hammer was that it really wasn’t a hammer, but just printed that way due to the flaws of the SPX (you’ll notice that index charts like SPX have very minimal overnight gaps, when compared to SPY, etc)…ergo probably not the best type of chart for candlestick analysis. Today really did give that hammer characteristic however, hence why so many other charts are showing the same, when they didn’t in May. I would take on some longs tomorrow if we open strong over today’s highs especially, and look for the “kangaroo tail” to form. And if it’s a fake out, use a tighter than normal stop…
great points tm!
Excellent recap Chess. I always appreciate your objectivity. I just spent the day watching and learning.
You’re doing well Kenai.
Great analysis as always!
I added a couple of small positions here in IAG, and SLW, but other than that, I’m taking the next few days off to lick my wounds from the recent drubbing I took. Currently in 92% cash.
I should be back to thinking about the market after the July 4th holiday.
What am I saying, I’m obviously reading your post and thinking about it now.
Thanks Hawaii.
Thing with going long today is that it seems like everyone is going long today — almost too obvious and too easy to be true.
Could be. Gauging sentiment is always a tricky game. The charts tell me it is worth putting on some risk here.
True. I raised some cash today, so I guess we’ll see what happens tomorrow.
chess; re hammer follow-up…
note how 30 minute charts and 65 minute charts can give a different picture of the confirmation process…
interesting points
Per my comments from yesterday: The two low gaps in the NYSE % A/D trading chart from Thursday have been filled with this drop. There’s a gap from today’s opening which means we either rally back near the close today or Tuesday. Could be a good entry for a daytrade long coming up a little later.
is that your main metric?
I daytrade options using an intraday chart of the NYSE % A/D as a guide. Actually, I don’t even need to watch price, just the action in the indicator. I combine, for an entry signal, stochastics and a linear regression m/a crossover.
The remarkable thing, besides just trading the chart, is that gaps are ALWAYS filled, either intraday or very shortly thereafter, so you can be very confident that a move in the gap’s direction is on its way.
Yesterday, we had two gaps near the lows. This morning we got a gap down from the opening. So I new we’d likely drop to the low gaps and now we’ll see when the upper gap is filled. No buy signal just yet.
Trading SPY and never holding overnite.
Hope that helps a litte:)
Now we may try and rally back to the opening gap I mentioned.
thanks for the feedback –appreciate you sharing what you are looking at
You’re very welcome. Have a very Patriotic Fourth of July. I believe we can still save the America that our forefathers and service men and women have so bravely fought and died for. Time to raise the flag!
And further, thanks for the good work you provide here.
You too! Thanks!