Market Stable, But Did It Bottom?
The market was obliterated again on Wednesday as the bulls lost nearly all of their hard earned gains from Tuesday. Volume was jacked once again as investors sprinted away from the big banks and financials, which led the indices lower. The big bank stocks like BAC, C and GS had it much worse and were down 10%, while WFC, BAC and Warren Buffett's Berkshire Hathaway were down 7%.
Yesterday was a critical loss for the bulls. Going into Wednesday every index had form a reversal pattern. And each of those reversal patterns were on high volume. The SPX, for example, formed a bullish harami that took the index back up to 1175 resistance.
The harami candlestick is one of the most basic technical patterns. The harami candle is a candle that resides entirely within the previous day candle. The harami can be a bullish or bearish reversal depending on whether it appears at the end of an uptrend (bearish pattern) or a downtrend (bullish pattern).
The candle is successful as a reversal pattern because it negates the prior day's price movement, which signals a reversal in sentiment and as a result price. The candle signals that the pre-existing trend ran out of steam and that a reversal in price is near. Also, the harami will act as an important support or resistance level in the future. Reversal days involving harami candles also will be accompanied by above average trading volume as price equilibrium is found.
Between bullish engulfing and the harami, you won't find more reliable reversal candles. But, equally as important as the initial bottoming candle is the ability to see continue price action in the direction of the reversal. In our case, I wanted to see the bulls take the market higher and above 1175. Only a move above Tuesday's high point (1173) can confirm a bottom was in place. If you want to view a successful harami in action, and the potency of the pattern, look at the price movement following the harami pattern on March 17 and April 19 2011 in SPX.
But a failed pattern gives us information too. A failed pattern lets us know that we have a strong resistance area near 1175. Additionally, it also warns us that the previous low, 1101, will likely be retested, or broken at some point in the short term.
The indices in Asia were mixed, but mostly lower. Europe trades with losses, but "only" a few percent. Cisco reported great earnings last night, which should rally CSCO and provide a measure of stability to the Nasdaq. And insiders, often viewed as people who know more about a company than you, have bought stock at the highest rate since 2009.
While the headlines were not as bearish as they could have been this morning, the bulls really dropped the ball yesterday. As I mentioned in the article, Can Bernanke Save the Market Again, buyers needed to support 1145. Since they couldn't, I favor a break of 1115 and a test of 1100 before a tradable low is made. Additionally, I also think the bottom will be formed with a gap down, that immediately reverses higher.
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