MARKET WRAP UP 05/25
I would like to focus this post on two main issues:
1) Whether today marked some sort of intermediate term bottom, and
2) Whether we will see confirmation of today’s impressive intraday reversal by the bulls.
Both of those inter-connected issues revolve around the type of candle that we printed on many (but not all) of the daily charts of the leading indices and sectors.
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.
The updated and annotated daily chart of the S&P 500, seen below, should illustrate to you what a hammer looks like, based on today’s price action.
Note that in early February, that particular correction ended with a bullish hammer as well. However, in order for us to find some enticing swing setups on the long side, we still need to see some follow through by the bulls in the coming days. What we are looking for is stabilization in many charts of the indices and individual issues. The most bullish scenario would be to see accumulation by the big institutions, which you should be able to see via strong buying volume, combined with charts building sound bases looking to catapult them higher up through tough resistance levels. Before we jump the gun, however, it is crucial to remember that we are still in a steep downtrend. We should not be making bold bets for anything other than a scalp, until we see more than one impressive day by the bulls.
It is also worth nothing that the market found support today right at the lows of February, in the 1040-1050 range. Although we made a marginally lower low, the bulls still presented themselves in a forceful manner. Thus, the issue of whether today marked any kind of intermediate capitulation remains to be seen in the coming days, but is indeed promising.
As I noted this weekend, the small caps and trannies have been showing us bullish divergences, as neither of them have closed below their respective 200 day moving averages. Their updated charts, seen below, reveal continued relative strength. This is particularly promising to the bulls, as both the trannies and small caps are historically market leading/confirming areas.
I suspect that all of these bullish divergences and hammers are causing those of you who have been waiting patiently in cash to lick your chops. As I noted today, I sold off my remaining “swing scalps,” and I am back to siting in 100% cash, so I, too, am chomping at the bit to get involved for longer term swing trades. However, we still need to hold off for now. That could change very quickly in the coming days, so the best idea I have right now is to assemble a watch list of charts that have held up well throughout this correction. If we see confirmation, I am eager to start posting extensive lists of individual setups for you again, as I did when we had a healthier market in late February, March, and early April.
Finally, note that the correction we have seen thus far has been more ferocious and technically damaging than any other selloff since the beginning of the March, 2009, bull run. Therefore, healing the wounds on the charts and forming a healthier market for swing trading is going to take time, and require some tough work by the bulls. Instead of exuberantly flying in off of the sidelines at a possible reversal, the better risk/reward strategy is to closely monitor the action, looking for signs of stabilization and accumulation.
If the follow through never comes to the upside, however, then we will still be in an ideal, heavy cash position waiting for a true bottom.