Technical Analysis | Stock Market Timing Signals | Top Stock Picks

The quadruple witching day – a quarterly event in which stock index futures and options, as well as individual stock future and options, all expire simultaneously – created increased volatility today.  In addition to the volatility, trading volume increased because of the contract unwinding taking place.

The broad market finished just about flat for the week but up approximately 70 points for the day.

So the squeeze continues.  Just when you think the market is breaking out up or down, it goes the other way.  Our cautious strategy will continue until this type of market action results in a clear direction with some momentum behind it.   

If you want more evidence of this market volatility, just check the market timing signals chart at the bottom.  In the last 3 weeks of trading the indicator have changed direction 6 times, a highly unusual event.  

Let’s take a look at the stock charts for a more detailed technical analysis and market timing insights.

On the weekly time frame, this weeks trading created a clear indecision type candlestick.  Prices finished just about where they started the week.  Because they started and finished flat, the lower channel trend line just keeps getting closer and closer to the market price levels.  This trend line also traces the direction of the 20 week moving average, the support area between 11,200 and 11,250, and the price break in late September of 2008.

The CCI indicator was up a little for the week, the MACD was flat – nothing new there – and the stochastic is flat.  What is noticeable about the weekly indicators is that prices are maintaining their level while the indicators decrease – not a great sign.  Trading volume for the week was higher than last week but that was mostly due to the increased trading volume due to the quadruple witching day mentioned above.

On the daily stock chart, the increase in trading volume is even more apparent.  Stock prices finished the day right at the upper end of the support/resistance level of 11,250.  The MACD and stochastic indicator finished up for the day but the MACD finished lower.   Prices on the daily chart also moved below the PSAR indicator so a tightening of stops and some profit taking on profitable positions may be prudent at this time.  This will protect your portfolio should the market break sharply to the downside.

The markets volatility is even clearer on the 30 minute chart.  Prices jumped out of the gate at the opening, fell back at the 10am reversal time until about lunchtime.  Late morning trading created a hammer candlestick at the lows for the day with prices climbing back into positive territory.  The last hour of trading created the bullish move to the 11,245 price level for the broad market.

Trading Strategy:

Prudent investors may want to sit this market out until a clear uptrend or downtrend develops.  If you want to take new positions use caution.

Aggressive investors and traders should play the market up or down as it develops. 

Use the expanded week-end edition of the top stock picks email for a large selection of stock picks for a variety of strategies.  

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.

In yesterdays email I discussed how the hammer candlestick formed in the days trading action could possibly lead to a limited rally in stock prices.  Today, stock prices ran up at the open, fell back 1/3 of the distance, then fell again and recovered slightly in the last hour of trading.  

All told, today’s trading resulted in a modest gain of 57 points.

Is this a move up that you should pay attention to?  Prices have not closed above the overhead resistance level of 11,250 that is the upper limit of this range bound market, so the answer for now is probably not.

Let’s take a look at the stock charts for a more in-depth technical analysis and market timing strategy.

On the weekly chart, prices have moved up to near the highs for the week.  The stochastic, MACD, and CCI indicators are fairly flat to dropping, indicating an overall weakness in momentum.  Stock prices are certainly at the lower end of the up trending channel and look like a rally could ensue, but until prices move up and indicators turn up, any daily rally is suspect.

The stochastic, MACD, and CCI indicators on the daily time frame are certainly starting to look a little stronger.  The stochastic and the CCI has triggered to the bullish side.  The MACD is still heading down.  Today’s action created another topping tail candlestick and still hasn’t closed above the overhead resistance line.  In addition, stock prices need to move up to the 11,310 level to trip the PSAR indicator to bullish.

This is a market that has some work to do before you can feel safe committing to long trades.  It is also noncommittal on the short side – although I think short trades are going to be in the near future based on the lackluster market action.

Trading Strategy:

This market remains range bound between 11,000 and 11,250.  Until stock prices close solidly outside these levels it will be difficult to create profits in either direction.  Prudent investors and trader should sit on the sidelines until a trend develops.  Aggressive investors should play the market up or down as price moves develop.

This post is a copy of the technical analysis and market timing email that was sent to subscribers exactly one week ago today.  If you are interested in a subscription so you can get these updates at the end of the trading day, visit our subscriber page.

An improving housing market report, a weak dollar, and a surge in commodity prices all helped push stock prices higher today – at least initially.

Stock prices shot out of the gate, with the broad market averages giving most of the gains back by the close of trading.

The Dow Industrial Average created a new high today while the broader market appears to be suffering slightly.  This divergent action between narrow averages and the broader market can be a sign of weakness.

The daily chart of the Wilshire 5000 average, the broadest stock price average widely available did not move above the price level indicator on today’s action while the Dow and the SP500 did.

In sympathy with the Wilshire 5000 index, the Nasdaq Composite also did not move up significantly.  Both these indexes that did not move above the price level indicator continue to look weak.  Interestingly, both the averages that did not move above the price level indicator are the broader ones.

Let’s take a look at the daily chart of the Wilshire 5000 (attached).

There are several ominous signs on this chart that will make us want to sit out the next few days of trading – especially due to the shorter week and the unpredictability of stock prices during holidays.

The price momentum indicator has not created a new high while the prices did create a new high in November trading.  Stock prices are still below the price level indicator and created a topping tail today which could lead to weakness in tomorrows trading.

Trading volume today was weak and in fact has been dropping all through the month.  This also contributes to the technical weakness in this chart.

On the hourly chart (attached) the price jump in this mornings trading did not reach the highs made since the middle of the month.  As with the daily chart the price momentum indicator is weak.  Traders spent most of the day giving back the gains made during the first hour of trading.  The last hour of trading moved under the price level indicator – perhaps indicating weakness for tomorrow?

Trading Strategy:

There are no solid reasons to assume a trend in either direction.  Our trading strategy is to wait until a direction can be identified before considering new positions.

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.

Stock prices dropped approximately 150 points within the first hour of trading, and then clawed their way back to the positive side, only to give up a net 43 points by the close of trading.

As discussed in yesterdays technical analysis post, today turned out to be a great day to sit and watch the market action.  Prices suffered a sharp drop at the opening bell – even though stock futures pointed to a higher opening.

So the caution indicator on the daily trend is still in place.  How about the weekly trend?

On the weekly stock chart the status has not changed much.  Prices are still near the PSAR and the CCI20 is still above the 100 line.  Both positions reflect a bullish market trend with continued vulnerability to a changing daily trend.  If prices on the daily time frame can mount a recovery it may lead to a renewed strength on the weekly chart.

Stock prices on the daily stock chart have formed what many technical analysts may refer to as a “hammer”.  Hammers usually form a short term bottom but there are several concerns with this particular candlestick pattern that may prevent a proper hammer interpretation.

First, the formation is not really at a significant bottom.  Because it has no real trend to reverse its usefulness as an indicator of a price low is in question.

Second, ideally a hammer would have a “shaved head”, which would mean that the open of the day would be the high of the day.  This condition is also not present.  So its significance as an indicator of a bottom is in question.

So on the daily time frame we would still want a bullish trip of the PSAR and the CCI20 remaining above the zero line to remove our cautious viewpoint of this market.

Looking at the hourly stock chart in a broader context, it appears that stock prices are forming a symmetrical triangle pattern.  These types of patterns are usually trend continuation patterns.  The configuration of this pattern seems to indicate that a price break-out of the upper trend line could potentially result in a rally of perhaps 400 points.

We’ll keep an eye out for a breakout and provide the technical analysis of any price break-outs as they occur.

Suggested trading strategies based on the current technical analysis and market timing signals:

For the complete daily trading strategy recommendations and updated market timing signals please visit the links shown below.