Friday, September 19, 2008


WHAT A WEEK!!! Goodness. How are YOU feeling today?

First, it’s worth noting the entire market instead of just the sectors to give an overview of the significance of today’s action. I would like to remind you one thing: It appears that both fundamentals and technicals really just don’t matter right now and the hand of the government is the primary driver of the market. I can give you 100 charts and an analysis for each, , but it doesn’t really matter, does it? Why…because anything can happen. 5 minutes after this article is posted, something can dramatically change my assessment. That’s how irrelevant analysis is right now. Don’t even get me started on the ridiculous and absolutely stupid ban on short-selling. What you saw today was a pure short-selling rally.

The S&P 500 and all of the sectors I’m profiling met significant resistance at either the 50-day MA or the 200-day MA or both and NONE were able close above their major resistance points. What does this tell you? Without committed buyers, the market will be difficult to hold up. This is a rally that will be short-lived, unless again, the government chooses do something even more dramatic. Monday will be a confirmation day as to where the market is likely to head for the week.

A Word on Gaps

Any gap that did not fully breakthrough the nearest point of resistance may still be considered a breakaway gap. If, however, Monday closes down and fills or starts to the gap, it is considered an area gap. Area gaps have a 90%+ chance of filling within three days. Breakaway gaps are formed on extremely high, above average volume that breaks from its current trend, without any doubt.

Notice the S&P 500 met the 50-day MA and was unable to close above it. Volume, although much higher than average, is starting to decline. I suspect that the next few days will present even lower volume. The best sign to see for a sustained and legitimate buyer-fueled rally is the volume.

The NASDAQ is the least affected index in terms of listed firms needing any sort of help (AIG – DJIA, Financials – S&P 500, etc.). Notice how the NASDAQ met resistance and was unable to breakthrough resistance. The difference here is that it formed a bearish gap up. I do consider this move has a breakaway gap due to high volume, which has a tendency to start a new trend in the direction of the gap, however, bearish gap ups require confirmation on the next day (Monday) to confirm whether the market is heading higher or sell off and put an end to this 2 day rally. Yeah, the shorts are still covering, but you never know…

The Materials sector (XLB) formed a dragonfly doji today, unable to break above the 50-day MA. The dragonfly doji represents a day where it opened up at a certain point, sold off throughout the day, but was able to close at or near its open. Volume was light compared to yesterdays down day volume.

The Health Care sector (XLV) formed a meet line pattern having gapped up above both major moving averages and closing below both near yesterday’s close. This is the largest bearish gap up in the chart and volume was especially weak compared to yesterday (a third of yesterday’s volume). This pattern gives a strong indication of a reversal due to the extreme change in sentiment, and the reliability of the pattern.

The Consumer Staples sector (XLP) formed the most bearish gap up of all the charts. Note the bearish gap up yesterday followed by another wider bearish gap up which ended lower than yesterday’s close. If a sector can’t get anywhere on a combined two-day 700 point move, then that’s a highly reliable indication that a continuation to the downside is imminent. Notice the decreased volume.

Having reached a 3-month high at the open, the Consumer Discretionary sector (XLY) was unable to hold at the 200-day MA. Now, the sector is sandwiched in between both moving averages. Expect some consolidation in this area. Volume levels are weakening to pre-rally levels.

At the time of this writing, the closing price for oil at the NYMEX is at $104.55. The Energy sector (XLE) formed a long-legged doji, different from the Materials sector’s dragonfly doji. The difference is that today’s intraday range was huge (an almost 10 point spread). Why is this significant? It tells you that energy went all over the place while moving all over the 50-day MA, but at the end of the day it didn’t make any difference. This is a classic indecision day that requires Monday’s confirmation for any sort of direction. Which ever the direction, you’ll see a strong follow-through.

The Financial sector (XLF) is the most important sector to focus on. Observe the breakaway bearish gap up that opened past each major resistance point up to the 200-day MA. You’ll notice this pattern (or the doji pattern) for the vast majority of the financials, most on lighter volume that the preceding day. Seriously, there are several banks that hit over 100% these two days. That just opens up a world of selling. Notice the volume cut in half? That’s confirmation for a lack of buyers. I wonder if the short-selling ban will continue to prop the market up since today showed a divergent intraday signal. Monday will be key for that determination.

The Industrials sector (XLI) did not make a new short-term high, but still rests within the primary downtrend. Another bearish gap up that got caught at the 50-day MA, and failed. Notice the 50% volume compared to yesterday.

Ditto for the Technology sector (XLK)

Monday Trading

Throughout this article, I have mentioned bearish gap up and doji patterns. Both are used to signal a reversal, especially effective at the top. I would look at Monday’s pre-market futures to see if there is a sign of weakness and no indication of a gap up in the morning. Minus the financials, a good ‘non-naked’ shorting opportunity would be present if there is weakness and a gap down at the open for any of these stocks, provided that they are not starting to the gap within 15-minutes. Otherwise, a gap up without heavy selling within 30-45 minutes usually indicates that the intraday trend is likely to higher. I could be wrong, but this is what I’m looking out for on Monday morning.

Have a great weekend!

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