Fred Goodman's MarketMonograph Free Sample

Thursday, July 22, 2010
Fred Goodman
Half of the primary Candlestick patterns have the same basic structure.

AT A GLANCE: Perhaps it was Bernanke's fault when he spoke somewhat pessimistically yesterday, but our suspicions about Tuesday's rally were well founded. The opening gap was turned back at the 50-day moving average, and this resulted in 59 bearish Candlesticks -- we'll see how many are confirmed today. The S&P 500 Swing Indicator will give a sell signal today unless there is a strong rally.

Yesterday there were 23 bearish Haramis, 18 Dark Cloud Covers and 18 bearish Engulfing patterns among the 200 stocks included in the NASDAQ 100 and S&P 100. They generally have been found in a ratio of 3 to 1 to 2, so this time there were many more Dark Cloud Covers than usual. There is a good chance many of these 59 patterns will be confirmed today, so let's review previous occasions when many were confirmed.

A Harami is characterized by the current day's open and close occurring in the opposite direction, and confined between the previous day's open and close. Here is a chart starting in 2003 that shows when there were many bearish Haramis.

Keep in mind that candlestick patterns have a short period of influence, perhaps just a few days to a week. If you look carefully below you will see that the market was usually weak immediately after multiple instances of bearish Haramis.

The difference between the bearish Harami and the Dark Cloud Cover is that the open of the latter is above the close of the previous day's candle while the Harami's open is below. In both patterns the close is above the open of the previous bullish candle. A further requirement for a Dark Cloud Cover is that its close must be below the midpoint of the previous day's open and close.

In many but not all of the cases of multiple confirmed Dark Cloud Covers, the market dipped for the next few days.

The bearish Engulfing Pattern seems to have a stronger influence on the ensuing days than its two cousins. Perhaps it's because it is a more volatile and extreme pattern, with both the open and close outside those of the previous day.

The S&P 500 Swing Indicator (SWI) will give a sell signal today unless the S&P manages to rally 22 points and close above 1092. The NASDAQ indicator is not far behind.

Furthermore, the S&P Short Trend Indicator (STI) will turn negative next week if the index closes below 1022.

Two positive indicators turned neutral, returning us to 2 negative, 22 neutral and 5 positive. The Summary Index rose to 11.35 and will reach 12.30 in a week if there are no further changes.

The current Quick Summary Index buy signal will remain in effect so long as the total number of negative indicators remains below 7.

The S&P 500 200-day moving average (green line above) added 0.22 points to 1112.91 while the 50-day moving average (blue line above) lost 1.81 points to 1086.72. Interestingly, the S&P opened just 0.05 points below the 50-day and has had considerable difficulty getting above it.

The Trend Indicator (pink line below) closed at 11.30. It continued to move higher because of the influence of the longer moving average.

The S&P 500 14-day Relative Strength Indicator (RSI) slipped just a point to 63.3%, but it will drop to 49.6% in a week unless the market rallies.

The S&P 500 Price/Volume Chart backed away from its potentially bullish clockwise pattern, but it continued to move in a clockwise direction.

The NASDAQ Price/Volume Chart made a counterclockwise sell loop at the top of the chart. Its current clockwise loop is not valid because of the remove one day rule.

The Average Signature of 2000 stocks turned up from below its buy signal trigger and gave another buy signal when it closed at 384. This was most likely the result of bounces in the last two days by the most oversold stocks.

Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. To send Fred your questions or comments, click here: Fred@MarketMonograph.com. E-mail sent to Fred may be edited for clarity and brevity and published on this web site, and may include your name unless you request anonymity or specify not for publication. The charts and commentary represent what Fred thinks about the market and what he is thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or may make trades in securities mentioned in these commentaries. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. Copyright©2001-2010 Fred Goodman. All rights reserved. For information purposes only, offered as a periodical of general circulation; not to be deemed to be recommendations for buying or selling specific securities or to constitute personalized investment advice. Derived from sources believed to be reliable, but no warranty is made as to accuracy.