Technical Analysis | Stock Market Timing Signals | Top Stock Picks

The current excuse is concern about the White House’s bank plan, Fed chief Bernanke’s future, and China’s lending practices.

Stocks lost almost 250 points today, or a little over 2% of value.  Trading volume was not quite as high as yesterdays, but still elevated from average.  This is likely to spell the death knoll for a resumption of this rally, at least in the near future.

So what are we doing now?  Right now we are sitting this slide out until the market moves up on a bounce, and then we’ll likely take short positions.

Let’s take a look at the charts for some more analysis.

Trading in January now shows a net loss of about 200 points.  It appears that the so-called  “January” effect – documented in many media outlets – may not be a valid justification for new long positions.

On the weekly chart, prices have fallen and closed well below the lower trend line, and also below the PSAR indicator, so the weekly chart is appearing to be entering a down trend.  The CCI is close to dropping below the zero line – and we really need these two events to occur for a confirmation of a new downtrend on the weekly time frame.

The daily stock chart is a disaster.  After a week of ratcheting back and forth at the top, prices have finally broken down and closed solidly below the prior low set in December.  On their way past the prior highs of Nov and Dec, the price action didn’t even pause.

Our momentum indicators are clearly bearish.

On the 30 minute chart, prices tried to hold a little below even for most of the day.  However, when traders returned from lunch it’s obvious that selling was the object of the day.  Prices fell sharply for the remainder of trading with the last hour of trading closing near the lows of the day

Trading Strategy:

If you were following the trading strategies described here then you probably managed to get out of profitable positions with most of the profit intact.  Any tightened stops were likely stopped out over the last few days of trading.

Next week I anticipate we’ll be watching for an opportunity to take short positions in this market.  Aggressive short traders may consider new short positions if the market continues down on Monday, however, the market is extremely extended to the downside so a prudent strategy would be to wait for a bounce back up to overhead resistance.

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View information on the model stock portfolio and how it grew by over 170% over the same time period that a buy-and-hold S&P 500 portfolio lost 14%.  No margin, options, penny stocks, commodities, or other high risk vehicles were used – just two well respected ETF stocks.

Get free, no obligation access to the real-time stock charts used in these posts.

View our free market timing signals ,  stock trading strategies , and stock trading forum at these links.

Technical Analysis, Market Timing, and Top Stock Pick posts are free on this blog but are delayed a few days. 

For a $1 trial of timely market timing updates and top stock picks emails sent to you after the close of the stock market on each trading day please visit our subscription page.

View information on the model stock portfolio and how it grew by over 170% over the same time period that a buy-and-hold S&P 500 portfolio lost 14%.  No margin, options, penny stocks, commodities, or other high risk vehicles were used – just two well respected ETF stocks.

Get free, no obligation access to the real-time stock charts used in these posts.

View our free market timing signals ,  stock trading strategies , and stock trading forum at these links.

Stocks certainly took it on the chin today right from the opening bell.  Alcoa announced disappointing earnings after the close of the market yesterday.  Alcoa’s dismal news combined with Chevron’s profit warning and the fact that prices have increased for 6 days straight through last Friday, made a correction a high probability.

The question is will this current pullback remain a consolidation at the current price levels or will a deeper correction transpire?  Technical analysis of the stock charts is not encouraging.

Yesterday, we also mentioned that the weekly chart was having difficulty building upwards momentum from the lower trend line.  In fact, with today’s price drop, the weekly chart is in danger of dropping below this trend line.  Prices are getting perilously close to dropping below the PSAR indicator which would not be good news.  The three momentum indicators are looking weak also.

On the daily chart all three price momentum indicators dropped today.  The stochastic and CCI are close to dropping below zero.  Stock prices dropped below the PSAR indicator which is a prime reason to tighten stops and take profits.  Trading volume increased.

On the 30 minute chart prices dropped sharply in the morning, dropped more until after lunch, and then recovered slightly.  Trading finished the last hour of trading with a hammer candlestick – which may add some momentum to tomorrows opening.  But remember, even if it does, one day does not make a trend.  We’ll need to watch for strength to return to at least the daily chart before considering new long positions.  And this assumes the weekly chart remains positive, and that doesn’t look good right now.

Trading Strategy:

Technical Analysis, Market Timing, and Top Stock Pick posts are free on this blog but are delayed a few days. 

For a $1 trial of timely market timing updates and top stock picks emails sent to you after the close of the stock market on each trading day please visit our subscription page.

View information on the model stock portfolio and how it grew by over 170% over the same time period that a buy-and-hold S&P 500 portfolio lost 14%.  No margin, options, penny stocks, commodities, or other high risk vehicles were used – just two well respected ETF stocks.

Get free, no obligation access to the real-time stock charts used in these posts.

View our free market timing signals ,  stock trading strategies , and stock trading forum at these links.

Our cautious strategy towards this market for the last week or two seems to have paid off as the broad market loses over 116 points in the last hour of trading this year. 

It remains to be seen if more profit taking will occur on Monday, or if the bulls will return to push this market higher.  Right now it seems that Thursday’s sharp loss could be an early indication of additional profit taking that may occur at least during the early part of January.  Technical analysis of the stock charts will yield additional market timing insights.

On the monthly time frame, price growth still continued through December, but at a slower pace than earlier in the year.  Two momentum indicators, the stochastic, and the MACD are pointing towards increasing upward momentum.  However, the CCI is not which is a worrying sign.

Trading volume on the monthly basis has also been moving down even after accounting for the end-of-year holidays – which points out how low November’s volume was.  December’s candlestick finished with a topping tail and the PSAR getting closer to tripping to a bearish condition.

Prices on the weekly time-frame are looking a little top heavy, but the daily chart is where all the real damage was done during Thursdays trading.  I mentioned a few days ago the daily chart was looking a little top-heavy.  Regular readers will recognize the strategy of trading when the weekly time frame matches the daily time frame, and right now both the weekly and daily are looking down.

The CCI and the stochastic on the daily chart are both sharply negative, moving sharply in the same direction that was observed earlier in the week so there really wasn’t any surprise that we had a meaningful drop in prices.  The MACD has not gone negative yet, however, the MACD usually follows the stochastic and the CCI so that isn’t a surprise.  What is notable about the MACD during December is how flat it was.

On the 30 minute chart you can see the drop in the morning hours, the flattening during the mid-part of the day, and then the sharp drop during the last hour of trading where the market gave up 80 points in 30 minutes – not a good sign.

Looking to the last chart in the series, SH, which is a Contra ETF, is starting to look positive.  This is another indicator of the increasing potential for a downward move in stock prices. 

Trading Strategy:

If you don’t already have stops in place to protect profits and your overall portfolio from large losses, now is the time to do so.  Traders should hold off from taking new long positions until we see how far this down move will go.

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.  

Trading action today created a classic “indecision day” type of candlestick on the daily chart.

After yesterday’s huge run-up, an indecision day is just what you’d like to see on the day after – unless prices run up again.  An indecision day gives the market a chance to digest recent gains and provides evidence that profit taking is not the first thing on trader’s minds.

The recent months of trading has produced several of these types of trading days, look at the daily chart on July 17, September 11, and most recently October 7.  All these days were indecision days after a run-up in prices. 

You’ll also note that after these indecision days, prices had a tendency to take-off to the upside again.  Will that be the case this week?  We hope so and our trading strategy – see below – will take advantage of this action if it occurs.

On the weekly chart, prices did not move up to trip the PSAR indicator into a bullish mode.  The CCI(20) moved up to a level of 93.63.  If prices move up tomorrow we could have a PSAR move to the bullish side which would also provide momentum for a break through of the overhead resistance at the 11,250 level.

On the daily chart, the CCI(20) has moved up to 57.22 and with stock prices still above the PSAR indicator, the daily mode appears to have some upward momentum left.

On the hourly chart you can see the controlled amount of profit taking that took place in the morning.  Another sign of strength were the bottoming tails that were created during the mid-day hours.  The last hours of trading recovered the morning loss and prices finished just about where they started.

The final hour of trading moved stock prices above the PSAR so perhaps this late day market strength will influence prices tomorrow.

Trading Strategy:

Traders should consider new long positions on trading days when prices are moving up.  This means that stock prices are above the high made during the first half hour of trading and moving higher.  Unless this condition occurs during the day tomorrow, traders should take no action.