Wednesday, April 30, 2008
Bearish Reversal Patterns
by David Yu
First of all, I want to thank one of my readers, J. Yao, for sending me a nice little program that extracts money flow data automatically. I'll have to play with it a little more to find the best use for it.
Here's a quick update to share a couple of interesting chart patterns with you.
Both the Fed's 0.25% rate cut and the advance GDP data were fully anticipated. There's no surprise there despite media's need to find a believable reason for the market action today. The news really didn't do anything other than serving as excuses for profit taking. The Fed's interest rate manipulations appeared to have reached diminishing marginal returns. It's reached a point where it yields almost no discernable output. The market's due to retreat anyway; today's just as good as any. And, this market predisposition is clearly illustrated in Chart 1 below.
I watched this Rising Wedge bearish reversal pattern developed on the 30-minute chart since the Q (Nasdaq 100 ETF) made an intraday high that surpassed April 24 intraday high at around 11:30 this morning. I slapped on the blue trendlines on the chart and waited for the formation to be completed by a major event, which happened to be the conclusion of the Fed's meeting this afternoon. Following the Fed's meeting, the price broke the lower support line with a sharp decline, and the volume exploded (blue circles). This met the classic completion requirement. The reversal had thus been confirmed.
Interestingly, with the divergence of the Accumulation/Distribution lower-high formation (upper pane) and the obvious development of the Rising Wedge reversal pattern, buyers continued to come in between 11:30 and 2:15 and kept the market afloat. Efficient Market Hypothesis told me that I couldn't possibly be the only one noticed this chart pattern. At any rate, yesterday's reaction low at around 47.06, which is 0.03 higher than today's low, has now become the important support/resistance threshold.
Chart 1
That's the short-term 11-day intraday chart. The longer term daily chart indicates similar bearish reversal probability. The last 2 candlesticks on Chart 2 below form a Dark Cloud Cover bearish reversal pattern. The low CLV (Close Location Value) today made the black candlestick penetrate more than 50% into the previous white candlestick body (closed below the halfway point of the white candlestick). This increases the probability of a top reversal. Of course, for this pattern to be confirmed, we'll need to see what happen tomorrow.
Chart 2
That's all the time I have for now. I'm not sure if I'd be around this weekend to write anything. We'll see.
Good night and good luck.
email: dyuguard-2@yahoo.com