The Doji That Predicted the Decline
The market broke free, momentarily, of 1197 resistance yesterday morning and pushed over 1% higher to start the day. But right around 10:00, most indices peaked, and by lunch they traded with minor losses. While the indices were able to bounce off those lows, most still finished flat on the day.
More important than the flat session was the inability of the bulls to keep the market above 1197 for the second time this week. Additionally, all major U.S. indices formed long wicked doji candles, which do qualify as a topping candle.
The doji candle itself is a candle that represents indecision and price stability. Since the candle requires the index or stock to close very near the open no momentum was made by either the bears or the bulls.
The wick is also an important component of the doji. Long lower or long upper "wicks" on the candle are evidence that the price moved violently up, down, or both during the day. The violent price action during the session before the index closed near the open price reflects a great amount of indecision.
While the doji candle will not alone qualify as a reversal candle, when other factors are present the doji can signal a short term shift of trend. And in our case, for SPX, and most of the U.S. indices, yesterday's doji qualified as a reversal.
The doji candle qualifies as a reversal signal in a few instances. The first instance is when a stock is extremely overbought or oversold. If you see a doji while its in an extreme condition, there is a great chance price is about to reverse.
The second instance is where the indices find themselves right now. Doji candles can also tip traders off to price changes when they occur at critical support or resistance zones.
The 1197 zone for SPX was an important level for the bulls to win, and for the bears to protect. After the bulls failed on Tuesday, then failed again on Wednesday (and formed the doji) odds favor a move lower to the next support zone, 1175. And should the bears nab that support zone away from the bulls, 1155 is the next target area.
The bears should get a "boost" from Europe today where fears spread that banks do not have adequate capital. In fact, the situation has become so dire, and the European bank stocks have been so obliterated, that the Fed is regularly meeting with them and expresses a high degree of concern for those banks. Needless to say, in this type of volatile market, any news that strikes fear is also likely to spark a sell-off.
Equities fell apart this morning, and SPX ripped through 1175 and 1155 in no time flat. Actually, SPX was stable at 1155 before Philly Fed was announced at 10:00 A.M. Once again the crack group, whom I'm beginning to think is on crack, of economists missed their estimate by a mile.
Regional Fed numbers are a big deal, and they tell market participants a lot about the current economy. Economists had predicted that that the Third Federal Reserve District would show 2, which indicates economic expansion. Instead the report showed negative 30. Negative 30! Not only did the economists miss by a mile, not only did they expect growth when the actual results showed a contraction, but that contraction was so severe that the last time the data was that negative was April 2009.
It sickens me that economists can be so wrong all the time. And that retail investors are stuck using bogus U.S. economic data that is completely revised (usually lower) in less than a month.
The fear stemming from Europe should add to the only invincible asset left, gold. Last week I sent a special report around featuring 5 gold and silver miners to buy. We picked up KGI from that special report, but the other four are still great buys right now. Make sure to download your copy if you have not already.
