Bearish Harami Friday...

DJIA - 148.38, -1.87% SP500 - 16.92, -2.33% NASDAQ Comp. - 41.80, -2.63% Russell 2000 - 16.30, -3.66% Exchange NYSE NASD Advancing 919 693 Declining 2,815 2,081 Oil $52.38 -$1.96 Gold $923.20 -$16.80 SOX 240.07 -5.10 VIX 41.04 +0.68 The VIX moved up and did confirm the move down in the SPX on Friday. Strongest Sectors: XLP -0.96%...XLU -1.00%...XLV -1.06% Weakest Sectors: XLF -3.08%...XLE -2.97%...XLY -2.66% Sector Watch Up Trending: Sideways: XLE, XLY, XLV, XLK, XLB Down Trending: XLF, XLP, XLI, XLU The broad indices were confined to a tight trading range on Friday with many stocks forming a bearish harami. This gives us a setup to look for potential short term exits on profitable bullish trades on Monday and potential entry into bearish trades. For this setup a trader typically will wait for the pattern confirmation. Since every trader is different, follow your rules. Just be aware that it is Yellow Alert again on Monday. Also many stocks have been consolidating in horizontal pattern between their 30 and 50 DMA, if this pattern slips below the 30 DMA, that will signal a short term change from sideways to down. The ES which moved down over night opened on Friday at 9:30 am ET at 816.75 and closed at 4:15 pm ET at 815.50. From open to close a net change of -1.25. Yes Friday turned into a classic trading range day that formed a bearish harami on the ES daily chart and many other individual stock charts...more to follow... Index Commentary – Yellow Alert The DJIA formed a bearish harami The SPX formed a bearish harami The Nasdaq formed a black candle with a lower high and lower low that closed at the low of the high day The RUT formed a bearish harami At the Open on Monday SPY – bearish harami SNDA – confirmed Thursday’s bearish harami DECK – broke the low of the high day UNP – bearish harami CTSH – support bounce failed, gapped down to new low X – lower high and lower low at 50 DMA DLB – bearish harami at 35 horizontal resistance CRM – pull back after support bounce on Thursday JASO – white spinning top after horizontal breakout GME – rallied on down market day ISRG – forming bearish pennant WYNN – lower high and lower low at 30 DMA Market Becoming Healthier Difference of opinion is what allows a market to work. In order to have a healthy stock market there must be both buyers and sellers. To have buyers and sellers there must be a difference of opinion. Without the difference of opinion that buyers and sellers have, a market becomes inefficient and unhealthy. At the extreme it would be locked; no buying or selling. Some commodity markets do in fact have limit moves and the trading is locked up and no sell orders are allowed even though there may be willing buyers and sellers beyond the daily limit. For example if everyone used the same buy signal to buy, when that buy signal did appear everyone would want to buy. If everyone wanted to buy, who would sell to them? No one would. Why? Because the traders who normally had a different opinion and did the selling would not want to sell because the buy signal appeared and they want to buy, not sell. The inverse would also be true if everyone used the same sell signal. When the sell signal did appear everyone would want to sell. If everyone wanted to sell, who would buy from them? No one would. Why? Because the sell signal appeared and those who might normally buy, want to sell not buy. The reality is everyone doesn’t use the same buy signal and the same sell signal. That is good, that improves efficiency and that is healthy. In the market every day there are buyers and there are sellers. When there are buyers that are willing to buy from a seller that is healthy. When someone wants to sell because they want to take a short term profit, they want cash, they found a better stock to buy, they want to put the money in real estate or they want to short the stock because they believe the stock will go down in the short term, it is healthy when a buyer has the opinion if I buy now I believe I will make money. Maybe the seller is looking over the next three days for the stock to go down and the buyer is looking over the next three months for the stock to go up. The reason the buyer buys when someone sells is not important. What is important is that the buyer that buys from the seller helps create an efficient healthy market. Recently we have had periods where buyers were scarce and prices fell precipitously, those were very unhealthy markets. Periods such as October 1 to 10, 2008, November 5 to 20, 2008, January 7 to 20, 2009 and February 10 to March 5, 2009 are examples of very unhealthy markets. The past three weeks, March 6 to 27, 2009 is an excellent example of the market becoming much healthier. Not because it went up, rather because buyers have appeared when sellers wanted to sell. Look at March 6, 9, 11, 13, 16, 19, 20, 24, 25 and today March 27. These are all days were sellers sold and buyers bought. Because the buyers were in the market in adequate size the markets paused, pulled back modestly and once the sellers were absorbed by the buyers, the up trend resumed. This is normal and healthy price consolidation. (click on image to enlarge) Notice on the SPX chart, which is the cash market, that eight of the last 14 days are consolidation days; days where sellers controlled the day enough to keep the trend from moving significantly higher or the trend actually pulled back. Sellers were selling and buyers were buying enough to maintain an orderly market. That means only six of these 14 days were strong up trend days. Why is this healthy consolidation and why did the up trend resume? This was healthy consolidation and the up trend resumed because there is a lot of cash on the sidelines that normally would have already been in the market, from 18 months of selling. That money wants to be in the market when its managers perceive that it is more likely than not that stock values will increase over the next several weeks to several months. In other words, the consolidations on these dates were perhaps smaller than they may have been at other times as a direct result of the high level of selling and the high level of cash that the selling had created. I have often referred to the “battle” between buyers and sellers at support and resistance levels. I have compared this battle to tug of war with a rope that most of us have either participated in or watched at some point in our life. I have also compared it to an arm wrestling match. In both the tug of war and the arm wrestle the opponents battle it out; back and forth the match goes until ultimately one side wins. In the stock market when price moves to a support or resistance level, buyers and sellers battle it out and price goes back and forth until ultimately one side wins. The fact that buyers keep appearing when sellers sell is a very healthy market and indicates a healthy difference of opinion. This is what happened on Friday. The futures dropped over night and the cash market opened down. Prices then fell, rose, fell, rose, fell and rose. Another way to say is sellers, buyers, sellers, buyers, sellers and buyers. (click on image to enlarge) On balance who was in control on Friday from Thursday’s close? Sellers Who was in control at the end on Friday? Buyers Was there a battle going on Friday between sellers and buyers? Yes Is it healthy for there to be a difference of opinion in the market? Yes Is it healthy for sellers to be able to exit their trades without the bottom of the market falling out? Yes Are the buyers stupid, bad, evil or creating an unhealthy market? No, they are trading based on their market perception and in fact their difference of opinion creates a more efficient and healthy market. So the next time you go to sell and someone is actually willing to make a market and buy your asset (stock, option, futures or FX) without dropping the price, express gratitude for an efficient and healthy market. The market is getting healthier and that is good for you, me and every other trader regardless of their market opinion. In a future post I will discuss this healthy market concept and how it relates to volatility. Yes, you guessed it…the fact that volatility is dropping is another factual piece of evidence that the market is becoming healthier. Stocks to Watch on Monday Leading Stocks: Holding Above 30 DMA BIDU, CLB, BKC, NFLX, DLTR, HANS, ICE, ALGT, DLB, JEC, PWR, VPRT, AMZN, MON, AAPL, CTSH, FLS, JOYG, AMX, APEI, AXYS, BAP, CAM, GMCR, GPRO, JCOM, JOSB, MUR, PETS, WMT, ATW, GR, BIIB, SLGN, SWN, SYNA, SNHY, EBAY, GES, RCI, SNA, ORCL, WRC, DECK, HDB, MOS, PCP, UYG, BLUD, PCLN, FAS, FSLR, GME, ESI, WCG, RIMM, NIHD, X, BDX, BYI, CBST, EXPW, HLF, JW.A, MYGN, STRA, MCD, CHL, CPLA, NTLS, WAB Moving Above 30 DMA = 0 Moving Below 30 DMA = 1 ACN Staying Below 30 DMA PPD. RBN, ESRX, PSYS, GILD, MHS, TDG, SPWRA, AMED, GXDX, DV, VAR, PCR, K, AFAM Friday’s Action Moving Up: DRYS, JASO, IPI Moving Down: Bearish Harami - STRA, PCLN, HANS, FSLR, LAMR, KMT, CLF, COH, BRCM, MOS, GRMN, SCHN, POT Confirmed Thursday’s Harami - BIDU, GS, BTU Eve Star - GDX, AEM, GG, INFY Lower High, Lower Low - NEM, GLD, ADM, ESRX, EBAY, ANR, AGU, FWLT, NDAQ, X, KBE, CNX, KRE Inside Day - AFAM, CF, MEE Intermediate Term Market Trend: Neutral – SPX, Nasdaq, RUT Down – DJIA Short Term Market Trend: Neutral