Wednesday, October 22, 2008

NASDAQ Technical Picture - Bearish Pennant

The market gapped lower on the open and formed a tight trading range just modestly above the lows as buyers preferred the safety of the sidelines. The break of this intraday trading range led to a steady retreat through the afternoon before a minor, late day bounce. Despite decent earnings from tech titan AAPL, the sizeable overseas retreat amid global economic concerns and the strengthening $USD vs. weaker global currencies led to the lowest close this year, and a well formed, bearish pennant on the daily chart. The worst performing sectors were led by Coal -19%, Gold/Silver XAU -16%, Oil Service -13, Healthcare -11%, Steel -11%, Paper -11%, Natural Gas -10%, and Oil -10%.

The attributes of a bearish pennant:

1. Consolidation of a straight line fall (flag pole);
2. Activity as measured by volume, diminishes appreciably as the pattern develops;
3. Breakout in the expected direction should occur within 2-3 weeks.

The only thing I will add is that despite declining volume during the pennant consolidation, volume is much higher than average. Not sure if that will change the outcome, but we'll soon find out.

Hats off to Larry for discerning this pattern a few days back!



3 comments:

lars said...

thanks for the mention about the pattern call.

i started building long S$P position today using the SSO leveraged etf... supply appears to be losing motivation and the market has enough built in buying fuel to pump up a nice end of year rally.... i'm dubbing this rally the obama rally which will no doubt set him up for the inevitable collapse that will happen at the beginning of his term. its a shame how Washington operates because ultimately the middle class (majority) gets hurt. but enough of the silly politics and bad bad actors.

a few lots here and there and i averaged into a position around 875 S$P. i anticipated a closing doji and got a bullish hammer which is also fine. i will potentially buy several more lots on a break of the downward sloping trendline from the top of the consolidation... potentially buy several more lots on a pullback to that level... several more on a break of 1000 or in anticipation of or pullback to 1000. honestly since this is a counter trend rally albeit one that will most likely be a convincing rally for bulls.... i am looking to keep my position small and to exit at 1100+ S$P and probably will not hold any higher than 1200 if we even get there. my time frame is until the end of January but since the markets like quick money and have large ranges nowadays I wouldn't be surprised if we get there a little sooner.

i'm also now flat gold after shorting at 880ish on jason lee's blog. i think it could probably bounce at 650 along with other commodities so i'll let it set-up a counter trend play at that level. i botched my expected time-frame on this trade but that's ok the move happened quicker than i expected.

i'm getting ready for a surgery next week and don't feel very good so i probably won't post or anything. just wanted to let you know i'm taking a position long the equity index because i believe we have more potential energy to the upside than the downside at this small moment in time.

lars said...

also on risk/stop management for the trade.

if supply appears to regain motivation i will exit the trade. however if a shake-out occurs i'll hold pat and potentially add at a lower price... i don't think we'll see a shake because i kinda felt like yesterday was a little shake out of traders and a little baby capitulation of intra-day little traders. i'll also hard stop the trade if we break these lows with convincing participation..

best regards and great blog...

Jamie said...

Lars,

Sorry to hear that you're not feeling well. Hope that the surgery is minor and successful.

Can't find Jason Lee's blog, only found Jason Lee, the actor.

I like the way the NAZ faked a breakout today but was unconfirmed on the broader averages. Still taking it day by day.

Gold support 700 to 650 (200 SMA)- early 2007 trading range. Waiting to see $USD weakness.