Technical Analysis | Stock Market Timing Signals | Top Stock Picks

Stock prices rose modestly on better-than-expected retail sales and consumer sentiment, but gains were limited by weakness in the strength of the US dollar and the technology sector.

Over this week of trading the broad indexes were fairly flat although the Dow Industrials did reach a new high – too bad the Dow only tracks 30 stocks!

Go to stock charts to access the charts referred to in this analysis.

Trading activities this week created a candlestick that is close to a hanging man formation.  Regular readers will recognize this formation as the same formation on the daily chart that started the current price consolidation between the 11,000 and 11,250 level.  The weekly stochastic, MACD, and CCI indicators were fairly flat, displaying little momentum up or down.

Stock prices on the weekly time frame are still at the support level of the up trending lower channel line so a rally from this level can’t be ruled out.  Prices are getting closer to the overhead resistance level at approximately 11,250.  A close above this level next week may jump-start this rally.  In anticipation of that happening we have sent 10 bullish stock picks to subscribers of the top stock picks email update.

On the daily stock chart, prices did indeed rally from the hammer formation from mid-week like I predicted in Wednesday’s technical analysis.  It remains to be seen if this 3 day rally will continue on Monday but if it does, prices could easily close above the 11,250 level, which would be an early indication that new long positions could be considered.  Market timing signals would then be solidly bullish.  In support of a close above the 11,250 level, the stochastic, MACD, and CCI are all showing a return to strength in upward price momentum.

On the hourly chart you can see that once again prices moved up briskly from the opening bell.  Late morning trading created a reversal that reached yesterday’s closing price.  A slow and steady rise into the closing hours of trading resulted in a return to the highs of the day and a modest increase of 47 points for the day.

Trading Strategy:

Prudent investors should not take any new long positions until a solid close has occurred above the overhead resistance level of approximately 11,250.  With this strategy in mind the earliest day to consider new long positions would be during Tuesdays trading.

Of course, the possibility exists that this consolidation could develop into a new down trend.  But the market is showing some early signs of strength that could re-invigorate this rally during next weeks trading.

The broad market sheds another 37 points in the third down day in a row following at least an interim trend reversal.

Economic conditions in the technology sector, continued dismal employment reports, coupled with concerns over retail sales during the holiday season contributed to a growing unease about the strength of any economic recovery.  Many analysts are now expecting a flat 2010 instead of an expansion of economic growth.

Let’s take a look at the attached charts for a technical analysis and market timing wrap-up for the week.

The weekly chart is looking vulnerable to further price drops.  It is clear that prices are having trouble moving significantly above the 11,000 support level.

Study the number of times the weekly relative price level indicator has swapped back and forth between bullish and bearish over the last two months.  A market that can’t make up its mind is vulnerable to price drops.  There is also a growing sense that stock prices have moved up in this rally further than economic conditions warrant.

On the daily chart stock prices moved below the relative price level indicator early in today’s trading.  This movement coupled with the price momentum falling below 100 could contribute significantly to additional price drops.

Stock prices are now probably going to be affected by the support level of 11,000.  Remember that overheard resistance, once broken, now becomes a support level on the return trip.  So expect some bounces in the days to come.

If you recall, the 11,000 level was the cause of several reversals and consolidation events over the last few months as prices moved up – but also lost momentum.  You could expect this level to provide some strength in the near future.  If prices break below this level then the mid 10,500’s become the next support area.

On the hourly chart prices dropped fairly sharply at the opening of today’s trading.  Prices recovered a little during the last hour of trading to finish in the middle of today’s trading range.

While prices moved above the relative price indicator during the last hour of trading, the last hour also created a topping tail.  This could lead to further weakness for Monday’s opening.

Trading Strategy:

Our market timing signals are indicating a continuation of downward pressure on stock prices for the near term.  Our top stock picks contain a mixture of stocks to short and Contra ETF’s for retirement accounts and traders who are not comfortable shorting stocks.

New short positions and Contra ETF positions should be considered on market down days.  Markets down days are characterized by prices being down after 10am market time and heading lower.

In a full confirmation of the Hanging Man candlestick charts created during the last two days of trading, the broad market shed 163 points or approximately 1.45% of value.

Ever since Monday’s sharp price increase we have felt bad about getting stopped out of the market with a profit on Monday, however, we feel a little better about it today!

Our technical analysis appears to have saved us again because today’s trading gave back all of Mondays gain and came just 6 points away from tripping the price indicator to a bearish mode. 

See the daily and hourly charts attached to this update to view today’s market action and market timing signals.

On the daily stock chart the price momentum indicator fell sharply below 100 to a level of 66.34.  This indicator is used to determine the movement of stock prices from the normal range. 

Just like any other indicator, the values are used for a confidence level, not a firm prediction of what may or may not happen.  However, the price momentum dropped from what is considered an oversold condition in today’s trading.  This usually indicates a return to – and frequently below – the middle of the current trading range for stock prices.

The price momentum when coupled with the price level creates a strong indication of the most likely direction of stock prices in the short term.

Stock prices narrowly missed tripping the price indicator to the downside.  If prices drop in tomorrows trading below the 11,030 level, then both the price momentum and the price level indicator will be bearish.  Prices need to drop 70 points from todays close to trip this indicator.  This may occur just with price volatility even if prices close at the same level as today.

On the hourly chart it’s clear that most of today’s sharp decline occurred during the first hour of trading.  The remainder of the trading day was spent around the lows created during the opening hour.  The last hour of trading created a small recovery off the days low.

Trading Strategy:

If the market opens down tomorrow and continues down after 10 am market time, traders should consider new positions in the Contra ETF’s and short selections provided in our top stock picks email alert.

Prudent traders should wait until the price indicator is tripped to bearish before taking new Contra ETF or short positions.

We’ve suggested that you take a cautionary approach to this market because of the last two hanging man candlestick charts and now today’s confirmation.  Do not consider new long positions until the trend reverses to the upside again.

If one hanging man candlestick is a technical analysis caution sign, do two in a row indicate more or less caution?

Yesterday we discussed the hanging man candlestick, what it could indicate, and its implications for traders and market timing signals.  Today’s trading created almost a carbon copy of yesterday’s candlestick with two slight differences. 

Today’s hanging man had a slightly longer topping tail and the closing price lost 11 points instead of a slight gain that was created yesterday.  However, these differences are not enough to rule out today as a hanging man pattern.  They also are not capable of confirming yesterdays hanging man as a reversal candlestick pattern.

On the daily stock chart (attached to this email) you can see the CCI(20) remains in the oversold condition at a value of 105.03.  Stock prices remain above the price indicator so from a strictly numbers viewpoint the daily chart is still bullish.

From a technical analysis viewpoint, traders should be very cautious in taking on new positions until the current consolidation resolves itself to either the up or down direction.

As we reviewed in yesterday’s technical analysis, the hanging man candlestick really needs a confirmation day prior to taking new positions based on any reversal indicated.  The best confirmation is both an open and a close lower than the prior days close.  Today’s open was right about the same as yesterdays close but today’s close was definitely lower. 

But was it lowers enough to justify confirmation?

Because another hanging man was created today, the close of todays trading was not low enough to confirm Tuesday’s hanging man.  So going forward we are still looking for a confirmation on this reversal pattern before new positions are recommended in either direction.

On the hourly chart (attached to this email) you can see the price drop that occurred during the morning hours with a fairly strong price recovery during the last hour of trading.  Whether this strength flows into tomorrows trading or not will determine our trading strategy.

Trading Strategy:

Current trading strategy depends on tomorrows trading action.

If prices move up above the highs of the last 3 days and prices continue to move up after 10 am market time, then new long positions should be considered.

If prices drop tomorrow, then we will evaluate the confirmation of a trend reversal after the close of the market.

As anticipated, today’s trading was tepid in comparison from yesterdays sharp price advance. 

Is this the pause that refreshes or signs of a deeper correction to come?

Refer to today’s stock charts for a visual representation of today’s technical analysis.  These charts are our primary focus for today’s technical analysis and market timing strategy.

Let’s take a look at the hourly chart first.

This chart is the same time frame as the daily chart.  This is useful because it can help you learn to detect relationships and market timing strategies between what happens when the hourly movement supports the daily chart and vice versa. 

First of all in today’s action, prices held solid at the open, fell about 80 points, then recovered during the last hours of trading to close a shade higher, adding about 8 points for the day.  Unless you are a day-trader that is pretty boring stuff.

Is this a good sign or a bad sign? 

Open the daily chart for a little deeper technical analysis.

Yesterdays trading, although a sharp increase in prices occurred, created a slight topping tail.  This would not ordinarily be cause for concern except for where in the trend it occurred.  Coupled with today’s candlestick pattern this combination may be indicating caution, here’s why:

Today’s candlestick created what’s referred to as a “hanging man”.  As its name implies, this type of pattern can have ominous overtones and frequently acts a reversal pattern.  Of course, this implies that there is a trend to reverse.  You can make a solid case that the trend has been up strongly since the beginning of November – so there certainly is a trend to reverse.  We all know that trends do not go on forever in any one direction!

The hanging man pattern has the following characteristics:

1. The real body is at the upper end of the trading range.
2. It has a long “bottoming tail”.
3. It has a short or no upper tail.

You’ll notice that today’s candlestick pattern matches these criteria very well.

So how should we adjust our strategy for tomorrows trading based on this technical analysis?

Trading Strategy:

There is no guarantee of a reversal taking place changing the daily trend to bearish, however, the evidence is pointing in that direction.  Reversal patterns are the market’s caution sign.  Successful trading entails having both the trend and probability on your side.

Hanging Man chart patterns work better once they are “confirmed”.  The type of confirmation to watch for is a lower opening tomorrow under the real body of the hanging man.  An even better confirmation is an open and a close under the real body.

With the market already a little extended, traders should watch tomorrows trading activity for an increased possibility of a downturn or consolidation at this level.  If prices move up from here, aggressive traders can play that price move but don’t expect it to run exceptionally long.

This is a time to take profits and tighten stops.