THE TRADER'S NOTES for Wednesday, October 13, 1999
Yesterday's Observations: S&P 500, Dow Industrials and Nasdaq 100 indices were all testing major resistance overhead over the past few trading sessions. S&P 500 formed a Japanese candlestick pattern named evening star at resistance that was supplied by the downtrend line seen on the daily chart, the 20-day EMA and the 50-day MA.
Trading on Tuesday confirmed a short-term top following the Connors Vix Reversal I and II sell setups observed on Monday on the S&P and the CBOE market volatility index. Recall this same set up pointed to a bottom being formed two days before the actual September 28 low. Details of the Connors Vix reversal set ups and trading strategies are found in amazon.com Connors on Advanced Trading Strategies by Larry Connors. Market internals are beginning to deteriorate as new NYSE 52-week lows expanding once again with new highs dropping.
After the market closed Intel (INTC) delivered earnings two cents shy of expectations. Note the uptrend on the daily chart had been broken in early September and, over the past two weeks, had formed a classic bear flag consolidation pattern at resistance at the 20-day EMA and 50-day MA. Yesterday's trading volume was unusually large and produced a Japanese candlestick named "spinning top", on a lower close, which was a negative going into the announcement. It was interesting how television announcers could hardly believe their eyes when the numbers came out, but the chart had been pointing down for sometime, scoring another point for the old saw of the technician that "price and volume never lie".
Today's Theme: With resistance confirmed, we need to look for some targets. For the S&P 500 and the Dow Industrials, the first target of the 20-say EMA below has been achieved. On the daily chart, the second target is now a test of the September 28 low. For the Nasdaq 100 index, the test of top was a failure, drawing a large bearish engulfing Japanese candlestick yesterday. The first target is the 20-day EMA below at 2482. The second target is 2350. The CBOE Internet index looks vulnerable at this point with resistance overhead in the 580 area. The first target for any retracement will be the 20-day EMA below at 500.
And last but not least, we can look forward to some economic data this week, with Retail Sales figures due this Thursday and Producer Price Index, Industrials Production and Capacity Utilization due on Friday. The market at the point is not able to move up on good news and goes down on bad news. Traders seem intent on focusing on inflationary aspects of all the economic reports, and with a new low in bonds again today, and ADX beginning to rise confirming the downtrend, this may well be a very long week again.
The Trader's Notes prepares the trader for the day ahead, providing information on market sentiment, internals, support/resistance levels and key pivot points in the major market indices. Use of moving averages and the Average Directional Index (ADX) indicator helps to determine whether the market is trending up/down or chopping sideways. Using Japanese candlestick charting techniques, observation of market action around support and resistance assists in the analysis of supply and demand based on fundamental principles of classical technical analysis. The results set up "if-then" scenarios used by the trader during market hours.
Technical analysis is not used as a tool to "predict" the future or to pick tops and bottoms. It is used to detect areas of trend change and emerging trends. In a trading range, traders generally look to buy at the low end of the range and to sell at the high end of the range - or stay out all together. In a trending market, traders generally look to enter the market on every retracement until it enters a trading range and ends on a test. The goal is to buy every dip in an uptrend and sell every rally in a downtrend. The trend is your friend until the end when it bends!
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