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.
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).
The $IWM small cap ETF has a similar type of hammer to the $QQQQ and $SPX.
I could run through all of the indices, sectors and issues, but a great many of them show similar types of candles. Though far from perfect hammers, they still need to be respected given the swoon we have seen. My analysis leads me to believe that the steep downtrend of the previous two weeks (and possibly the past two months as well) is poised to take a break in the form of a reflex rally. Accordingly, I allocated 40% of my capital to the long side today, as noted in an earlier post. Being a contrarian is not one of my hallmarks, but I do believe that taking on risk when I see an edge will always be a weapon in my arsenal. Whether this is a yearly bottom is anyone’s guess, and I have no interest in betting on something like that. In fact, I do not need to. A tradable temporary bottom is all that I think is worth betting on at this point.
- LONG: 40% ($AAP $NR $NTAP $LULU $CRM)