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We know that Wednesday went out on a high note for the bears, with many bulls who were positioned for a seemingly inevitable breakout from the ubiquitous symmetrical triangle forced to hit the exits into the closing bell. Thus, the pertinent issue is just how dangerous the situation currently is. Earlier in the trading session, the oil service plays and the semiconductors were acting brilliantly, especially in the face of the widely-watched, high momentum “leaders” flashing red. Despite that relative and absolute strength for a decent chunk of the session, you can see the magnitude of those intraday downside reversals below on the daily charts of the OIH and SMH, respectively. Indeed, there were very few sacred cows spared from the fast and furious sell-off on Wednesday afternoon.
Putting Wednesday’s action into context of the overall picture, the broad market remains in consolidation mode just above the summer trading range. We have backtested the upper end of that range several times in recent weeks, and a basic tenet of technical analysis is that the more times you probe a key reference point, the more likely it is to eventually give way. So, there are only so many times the bulls can hope to save the day at around the 1220-1230 level on the S&P 500. Moreover, if you have been watching my daily video market recaps, then you know I emphasize the idea that no matter how pretty a consolidation or triangle appears, if buyers of size do not commit at least somewhat you will be hard-pressed to enjoy that elusive breakout.
While we are on the topic of tenets, you know that I always harp on the notion that individual candlestick analysis needs to account for placement. As an example, you can see what bears would call “shooting star” candlesticks on the charts below for Wednesday’s session. However, the shooting star is most valid at the end of prior uptrend, signaling the potential change in trend. This time, we are seeing this candle within the context of a broader consolidation. So, I would assign much less significance to that line of thinking. Beyond that, because we remain within bounds of the playing field in the consolidation, you have to be even more vigilant against potential traps. Wednesday could easily represent one of those traps for eager bears to have fallen into, again because of the placement of these reversal candles. To be sure, it was a nasty reversal after a potential breakout from the triangle, but it could just as easily mean these charts need even more time to base.
The nature of a consolidation is that getting too bullish at the top of the range is as perilous as becoming bearish at the bottom of it. At this point, the symmetrical triangles on the S&P and many other charts are so widely-watched that the consensus is that resolution is coming sooner than later. I am ready for anything, but another scenario I think is a distinct possibility is that the triangle morphs into another pattern as the choppy price action continues. Either way, inside 12631 we have a sound strategy regardless of the outcome, and we are notably outperforming even this dangerous market.
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Very important to remember, thanks for brining it up about where the candles are mean a ton along with what kind of candles they are. Need both for more weight.
Cheers
Chess:
Your so money! great posts today. thanks.
Haha, thanks Sue.