The hammer candle retest of the channel resistance-turned-support line on the Russell 2000 chart in Thursday’s session could be a key factor in determining the intermediate term direction of the small cap stocks, and potentially the broader market indices.
The small cap stocks have been underperforming the DJIA, the S&P 500, and the NASDAQ Composite year-to-date, and it is unlikely that relationship can continue without eventually being a drag on those indices. Small cap’s often lead the markets either higher or lower and a failure of the Russell to hold the 1390 level could be the straw that breaks the back of the broader and overextended market rally. On the other hand, a sharp bounce off the channel top and a catch-up move could help to sustain the current market momentum. The Russell 2000 is the index to watch over the next several sessions.
Check out the charts of Exxon Mobil (XOM), Van Eck Sectors Oil Services ETF (OIH), and the West Texas Intermediate Crude Continuous Contract (WTIC) for an overview of the broad energy sector, in my article on TheStreet.com this morning.
The SPDR S&P Biotech ETF (XBI) was trading in a four month symmetrical triangle before it broke out of pattern resistance this month. The fund rallied back up to its September high, but on Tuesday a bearish dark cloud cover candle formed over the previous session’s large bullish white candle. There was follow-through downside action in Wednesday’s session and the close, which was near the low of the day, penetrated a small uptrend line that defined the recent rise. The stochastic oscillator is moving down and out of an overbought condition and similar moves have marked previous highs during the consolidation period. Chaikin money flow suggests the biotech fund is being accumulated, but the money flow index, which is a volume-weighted momentum indicator, is in a severely overbought condition. It looks like some consolidation or regrouping will be required before a second attempt can be made at retaking last year’s high.
At 1:50 on Wednesday, the first of two high wick or long upper shadow candles formed on the ten minute SPDR S&P 500 (SPY) chart. It looked like a tradeable pullback was coming, similar to the one that followed the eveningstar reversal pattern that formed just after 11:00 and took price back to the VWAP, but instead there was a ramp up into the final hour of trading.
On Thursday the ETF was tracking lower going into the final two hours of the session and there was a rebound that saw the broader market rally into the close. Then, in the final session of the week, the 234.40 level acted a solid resistance for most of the day, until around 2:00 when the SPY broke above that level and rallied into the end of the trading week.
These small reversals in price had a larger effect on the appearance of the daily candles. In the case of Friday’s candle, instead of a large bullish white candle forming, a high wick or upper shadow shooting star candle would have formed suggesting an inability to hold all-time high levels — what would have been a clearly cautious candle.
Does this price action suggest machine manipulation or simply reflect the dynamics of a momentum driven market? I think the latter, but either way it is tough to trade.
Monday’s close on the Russell 2000 marked a third consecutive higher close for the index. This hasn’t happened since it began forming a horizontal channel consolidation pattern in December last year.
The bad news is that a gravestone doji formed in the session, a candle with a narrow opening and closing range situated at the lower end of its overall range. A gravestone is often seen at failed new highs. Previous channel highs have been marked by similar bearish formations, like the early channel eveningstar pattern and a series of dark cloud cover candles, all of which prevented more than a two day advance.
A potential breakout pattern and an overhead resistance vacuum, could initiate the second phase of a rally in the precious metal miners. Here’s my technical take published on TheStreet.com this morning.
The 2180 level on the S&P 500 chart was key resistance for most of 2016 before it was penetrated in late November that year. A quick retest of that resistance-turned-support level was necessary before the index continued higher, and a similar process may be underway again this year.
The 2280 level has acted as resistance for the last two months. Last week the index broke above that level but has quickly pulled back to retest it, and in the Tuesday and Wednesday session closed just fractionally below it. The index is at a critical juncture and needs to regain its initial positive momentum or run the risk of a failed breakout.
Alphabet (GOOGL) is up 8% over the past 52 weeks, but has underperformed all its FANG counterparts by a considerable margin in that time on multiple time frames. That trend looks likely to continue at least in the short term. Here is a strategy to take profits in Alphabet into a tech bounce.
The DJIA held above the 20,000 level in Friday’s flat session and the S&P 500 didn’t form an eveningstar pattern. There was some speculation among (bearish) traders that an eveningstar was under construction on the S&P 500 daily chart, with Thursday’s narrow range doji candle forming after a larger white candle, and Friday’s weak open. The Friday close, however, was near the mid-range of the session and the resulting candle did not fit the three-day pattern of strong up day, followed by narrow opening and closing range doji, and completed by a strong down day. A pullback to the 2280 to 2270 area is certainly possible over the short term but with the RSI below its oversold level and Chaikin money flow well into positive territory, there are no signs of a significant reversal on this chart.
DOW 20,000 is more than just a psychological level; it may help to define the character of the weekly candle, which could have bullish or bearish implications, particularly at new highs. At this point in the trading week the incomplete price action has formed a white marubozu or a large white candle with little or no upper and lower shadows, which is considered to be a bullish candle. But the weekly candle still has another day to mature.
If the index were to see a pullback of 100.92 points from its close on Thursday, it would move back below the 20,000 level and form a moderately high wick candle. This high wick or long upper shadow would not qualify as a shooting star or doji candle but would reflect some level of rejection. A shooting star or a doji would require a close approximately 200 points or more lower, and that would clearly be a bearish candle.
So, the 20,000 level has more than just a psychological implication. The ability to hold above it will color the weekly candle and, perhaps reveal a little about investor conviction.