Tuesday, August 21, 2012

Market Chart Alert: Dow Double Engulfing Day Signals Start of Turnaround

For as long as just about anyone who charts stocks and indices can remember, the pattern which appeared in today's session should be a primary signal that stocks are ready for an abrupt turn - and this one is decidedly to the downside.

Notwithstanding ongoing market manipulation to the contrary, which has pushed stocks to extreme levels over the past few months when just the opposite appeared more likely on poor data, low volume and other bearish signals, the double engulfing pattern - in which the high and low of today exceeded the highs and lows of the previous two sessions - is a bright red flashing light to chartists everywhere.

The Dow Jones Industrials took a rather abrupt turn late morning. After a slow start, the index reached the high point of the day (13,330.76) just before 11:00 am EDT, hovered in that area, then began a serious decline a short time later, finally dipping into the red around noon.

For the rest of the session, the Dow, carrying the other major indices along with it, continued a slow descent until bottoming out around 3:15 pm EDT at 13,186.60, eventually finishing just 16 points off the low, yet another bearish signal.

The trading range of 144 points exceeded the highs and lows from Friday and Monday's trading, on both sides and was the widest range since August 3rd, when the index ranged 148 points, but finished higher by 111 points.

The headwinds that have been pushing against stocks for a while (could be two months, two quarters or two years, depending on perspective) may finally be taking its toll on the trading community, though there's also sufficient data to determine that stocks have reached the upper limit for the short turn, coming a whisker within the 52-week high of 13,338.66, achieved on May 1st.

While the chart is eliciting a strong double-top formation, the gain from Dow 12035.09 to today's high - a rally of 1,295 points, or, roughly 10%, from June 4, was built on a series of sharp one-or-two-day upside moves with intermittent, short selloffs in between until the baby-step gains typical of the past two weeks.

In simpler terms, the market may just have run out of gas, the problems in Europe and the coming crucial elections and fiscal cliff all creating significant uncertainty in the minds of investors and traders.

A pull-back from these current nose-bleed levels would not be without precedent; indeed, the month of May shook out to the same amount as the gains in June, July and August combined.

What happens next is anyone's guess, and the transportation average is offering a bit of a clue, having finished the day just 0.23 short of the high made on Friday, a one-month high, but well short of the 52-week high set on May 2nd, 5334.52.

The issues plaguing the market and the general economy still are persistent and a shock to the system may be forthcoming, especially since neither the Europeans nor the Federal Reserve seem committed to further monetary easing, something market participants have been lobbying for over the past four to six months.

With November's elections coming fast, the Fed is very reluctant to make any abrupt announcements, while in Europe, the cries from Germany to stop the Ponzi-like bailouts of the southern sovereigns grows louder with each proceeding day.

Despite market breadth being only moderately negative and new highs - new lows reading nearly off the charts positive, we'll await confirmation from these and/or other metrics before making an all-red bear call.

Adding to the market consternation on the day were the continued run-up in safe haven assets, gold and silver, both reliable indicators of general fear in the marketplace.

As for the ongoing rally in crude oil, that is more a function of the time of year, when market insiders annually push prices to their highest levels preceding the Labor Day holiday, just two weeks hence.

Dow 13,203.58, -68.06 (0.51%)
NASDAQ 3,067.26, -8.95 (0.29%)
S&P 500 1,413.17, -4.96 (0.35%)
NYSE Composite 8,082.68, -11.65 (0.14%)
NASDAQ Volume 1,574,080,875
NYSE Volume 3,249,264,250
Combined NYSE & NASDAQ Advance - Decline: 2408-3071
Combined NYSE & NASDAQ New highs - New lows: 264-32
WTI crude oil: 96.68, +0.71
Gold: 1,642.90, +19.90
Silver: 29.43, +0.83

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