Both the daily charts and the weekly charts show a “Hammer” formation last week. The hammer is a pretty good indicator of a turnaround point – it results from a washout intra-day with a close near the open of the day. It’s a sign that the weak players capitulated in the morning, and strong/smart hands came in to take advantage of their panic selling by scooping up the washed out stocks.
Last Wednesday was the hammer candle date, having watched the market melt down from an open of near 1870, melting down to 1810, then closing not too far off of the open at around 1860. The weekly hammer was punctuated by the strong recovery days on Thursday and Friday. Probability is for a rally over the coming 1-2 weeks. Dovish talk by the Fed this week would add to that potential. Click on the charts below to enlarge.
Target range for the S&P’s rally lies between 1950 – 2000. Bearish trends seen on both daily and now weekly charts, along with big-picture indicators such as bearish breadth, the break and maintaining of price below the 200 day MA, a break of midterm trendlines, and longer termed MACD trends suggest this market is entering into a mid-termed bear phase. This rally is one to be sold, unless you have enough fortitude to withstand what could be a strong correction before the next bull phase begins. I don’t have such a strong stomach.
So what’s the plan?
My plan is to sell stocks incrementally starting around 1950, and leg out if the rally continues. If it reverses strongly from my first leg out, I will sell more aggressively. Today’s futures are pointing down as I write this blog, but the Fed meeting is yet to come. Let’s see how that plays out.
On this coming Wednesday’s blog, I would like to cover 3 ideas that might profit in what I perceive to be a mid-termed bear market that may last a few months. Stay tuned.
Keith on BNN
I’ll be on BNN’s MarketCall show this Friday January 29th at 1:00pm. Tune in for this one if you can – I hope it to be enlightening.
I too identified the hammer and bought into the market later on Wednesday, but the volume was only 40% above average. That made me nervous and as such I sold out the next day. It didn’t seem like there was “blood on the streets” type panic on Wednesday. Could I ask please how much volume do you consider necessary to validate a short term or long term bottom hammer candlestick?
Chris–I don’t look for a specific # of shares–rather, I look for comparatively higher volume than has been the trend over the past weeks–I tend to eyeball the chart and note if there was a volume increase or not on the candlestick pattern I am watching. Last week –specifically Wednesday – did see comparatively higher volume than has been the pattern of late–it looked to me about 20-25% more volume or thereabouts from the daily normal volume leading into that day. So too did the August bottom–probably about 25-30% more volume on the August reversal day before the rally into September.
And yes, it certainly wasn’t blood on the streets last week. But, lets say there was enough washout and reversal to increase the potential of a neartermed upswing, which is all I am looking for.
I guess we shall see!
Thanks for the feedback as always Keith! Cheers!
Hi Keith, thanks for the update.
I’m wondering how to approach my TSX index ETF. I want to reduce some of that on this bounce, but wonder what kind of bounce to plan for.
In these circumstances, would you be looking at the TSX for its own technical levels (maybe resistance at 12700??), or would you simply correlate the move in the SPX? (i.e., when the SPX hits 1950, then start selling some TSX).
What a move in the Cnd banks last week! Oil and CAD tipped up and boom. Interesting. But I still want to lighten up on TSX.
Thanks for any insight.
Alex–depends on your timeframe. I do think you will get a near termed rally in sync with US markets to some extent by the TSX. But there is more pressure on the TSX by energy than the US markets, so we have to watch oil in a big way. That’s why the banks went up last week–they track oil to some extent, at least lately.
So–timeframe wise–I think there will be a sell opportunity for NA markets in general in the next 1-2 weeks. The TSX will be muted or amplified by oil’s movements in that rally.
Interesting, though, is a thought I have about oil. I’ve traded for 26 years now, and I can tell you that whenever you get a big, long downtrend on a commodity like this, it ends with a bang–eventually. The selloff on oil is becoming overdone, although that is not to suggest it cant go down further–but its closer to a bottom than a top – that’s fairly obvious. Further, even if it remains in a downtrend (which it could) for several more months, it has not had a counter-trend move beyond the last couple of days of last week. I wonder if that rally will be the extent of it–but my experience tells me that there may be a bigger counter trend move–if not an outright bottom in oil coming within the next month or so. That would line up with seasonal tendencies for oil to bottom in late Feb. That in turn, if it does occur, will affect the TSX positively-
That’s my two cents worth.
Thanks. That puts a spin on things: If oil were to bottom, or interim bottom, in next month or two, we could be looking at the TSX rising (cyclical bull?) against a SPX falling (cyclical bear?).
I have a long time frame, and I’m not the nimblest of traders, so maybe it makes sense to leave my TSX well enough alone and ride it out. I’m risking diminishing returns: I lightened up on my Cnd stuff a while back so my Cnd exposure is no where near overweight at this point.
I couldnt click on those charts, Keith.
Yes, for some reason that feature isnt working. I will have my IT person look at it. Thanks Bob
All fixed 😉
BTW–anyone need a good internet IT and website person–Lauren Pibworth has been my go-to for many years.
What do you make of the NYSE already breaking lows that the S&P has not is there any significance to that?
Yes–its a showing of terrible internal market strength. That is: Bad breadth!
Speaking of breadth, the U.S. banks don’t look great. I know you have recommended BBT and the U.S. bank etf before. Is this a point to consider selling after a short term rally? It paints a bad picture on the charts.
Yes Eric–we are looking to sell our US bank exposure in a rally that approaches my target zone of 1950-2000 on the S&P500.
Lots of sectors and stocks that were looking good are now looking bad. So that itself is a sign of breaking market internals.
On Market call last evening Ross Healy made his assessment which I think resonates well with what you are suggesting in your blog here. Some of his statements were:
we are not in a bear market
This is a market correction, and from our analysis, it has not yet run its course
The S&P 500 ….having reached its maximum, it is now correcting to its minimum as far as we can see.
That should carry the market to roughly the 1,700-35 range (note Jan 26 the S&P closed at 1903.So going from 1903 to 1700 would be a further 10.7% drop.)
I don’t recall you suggesting how low you think a correction could go but does the 1700 level have some relevance in your mind? So we loyal followers of your blog are awaiting the 1950 mark (which is only 2.5% higher than Tuesday’s close) to then convert to some cash.
BTW you do seem to have many followers and certainly I appreciate this blog.
Thanks Daddyo–I believe we have about 3000 individual followers of the blog now. Pass it on to your friends!
Anyhow–I noted back on January 11th that my target (potentially) was 1700 for the S&P. So I guess great minds think alike…
Here’s my blog with that target: https://www.valuetrend.ca/short-termed-bounce/
Today the Fed gives us guidance for policy. Should be interesting….
hello does anybody write covered calls to protect if there is any near future downside or is that worth it?
I don’t–you are committed to holding the stock unless you want to go “naked”.