THE TRADER'S NOTES for Thursday, November 18, 1999
We had expected yesterday's trading to be a consolidation type of day after the spike following the FOMC meeting on Tuesday. One interesting thing mentioned on CNBC over the past week or so is how much volume is being trading on the NASDAQ. Well, heavy volume on a breakout is good, but if it is no longer going up, then it's an indication of sellers at work.
In the case of the NDX, it formed a Japanese Candlestick pattern named dark cloud cover on the daily chart. If yesterday's low is broken, then we can expect a short-term top to be in place. Given the strength of the Nasdaq 100 index, one would first expect buyers to show up to buy any dip back to the 20-day EMA at 2730ish.
Market internals are not great, with NYSE 52-week new lows outnumbering new highs yesterday. The 10-day MA of the net differential is turning over. Finally we have a push down on the VIX to the lower Bollinger Band. Things are coming to a head right here. It's do or die time. Big time.
At this juncture, we should be looking at weekly charts in order to see the big picture. It has been a long time since most of the major market indices have made a test of top in this time frame and it is of vital importance to the bull market's health to pass this test with flying colors. The S&P 500 Index is making a 20-week high right here in record territory. The Dow Jones Industrial Index is a laggard, far behind the others. The CBOE Internet Index is also marking a 20-week high at resistance. As these are weekly charts, we will be watching them in that time frame, letting this week draw its bar before getting the verdict next week. The important thing to watch will be this week's lows.
After taking a day to consider the latest move made by the FOMC, sellers took control of Treasury bonds, trapping the breakout players. The 20-day MA at 113^17 is going to be critical to hold in the days going forward.
It has been some time since we last reviewed the intermarket chart. We hear the weekly chart of the Dow Utilities Index whispering the words "head and shoulders top". Interest rates held a dip back to the 20-week MA. The U.S. dollar is trying to bounce. And last, but not least, the CRB index of commodities is not going down. Are we hearing this message loud and clear?
The Trader's Notes prepares the trader for the day ahead, providing observations on market sentiment, internals, support/resistance levels and key pivot points in the major market indices using the daily chart. 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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