Long Tail Hammer in a White Dress, A Key Reversal Day...NOT a Head and Shoudlers Pattern...

A long tail hammer in a white dress…

Just a 26 points "beautiful 'n' tall"

“Well, I told her,

‘Don’t get scared, ‘

Cause you’re gonna be spared…’

Just one look I was a bad mess

‘Cause that long” tail hammer had it all,

Had it all…

Click this link to hear the song:  http://www.youtube.com/watch?v=3qKOv3VBJcc

Susan said to me, “Why are you all of a sudden interested in that song?”

I replied because of what the market did today.

She jumped on one of her general news sites and found a story “Scary Chart Pattern Suggests More Selling on the Way.”

“What?” I exclaimed, “this is a long tail hammer in a white dress, a key reversal day.  No wonder people get so confused about the market.  Talking heads calling this a head a shoulders pattern…again…reminds me of the summer of 2009, when most talking heads were claiming that the May, June July trading range was a head and shoulders pattern.  I said “no” then and I say “NO” today!

Don’t get me wrong the market can go down from here.  If it does go down from here, it is not because of a head and shoulders pattern.  It will be, because of the broken support of a sideways trading range, sideways trend or channel. 

This is not a head and shoulders pattern because there are too many tops and bottoms…it is a price channel consolidation.

Because the t-heads see the chart wrong they are missing the amazingly bullish information on the hard right edge today…

The long tail hammer in a white dress is a pattern I have been talking about for years.  In fact some you may remember Thursday, June 8, 2006 when I pointed it out in the Active Investor Talk.  It wasn’t the exact low of that pull back, but it did establish the support area and the exact low was made the following Wednesday, June 14.  From that low the SPX rose 238 points almost 20% over the next 8 months.

One listener emailed me the next day Friday and wrote, "great session last night, but all that bullish talk was unnecessary."  So the fact that the t-heads think today's action is bearish is all the more bullish. 

Since then I have pointed out the long tail hammers in my live and webcast sessions and they have been a very high probability pattern for a bullish reversal to the upside.

So what’s all the fuss today…

This long tail hammer in a white dress is a key reversal day, which follows a down trend that has a capitulation selloff that reverses on heavy buying and closes higher than the prior day’s close.

I’ll reference the action on SPY, the ETF for the SPX so that we can reference volume.

The SPY traded from 125.67 to 123.54 in the first 68 minutes of trading on about 21 million shares.  At 10:38 a one minute hammer was formed on 1 million shares of trading in that one minute.  At the time that was the high minute volume for the day.  It was a classic capitulation bottom.  There is also a hammer on the 30 and 60 minute charts at that time.

In the last minute of the day, the SPY traded 1.37 million shares, its highest one minute volume of the day, while closing near its high.  It was strong buying into the close.  At the end of the day the SPY traded 370.6 million shares, its second highest daily volume of the year.

The highest daily volume of the year was 467.5 million shares on March 16, which ironically was the exact low at 124.12 of the February to March correction.  The next day March 17 the SPY reversed and began its six-week rally to 136.50.  Look closely at your charts and you will see that typically the heaviest volume days are near lows as weak sellers finally capitulate due to the pain of trading poorly.  Once weak sellers are out big money buyers step in once again.

That’s exactly what we saw today.  Selling of about 21 million shares into the low and almost 350 million shares after that as buyers took the SPX up over 25 points.

In a Chart Shell… a Bullish Key Reversal Day...

A down trend

Capitulation selling into a lower low

Heavy buying

Wide trading range

Bullish candle pattern

Close above the prior day’s close

In Detroit Tuesday night Tom and I pointed out that price was near support and to the credit of the 240 traders there the vocal majority said they believed the right action to take at support was to buy.  Tom gave them kudos for seeing it the smart way.

Just like June 8, 2006 the long tail hammer in a white dress does not have to be the low, but there is a good probability based on the way the index is being traded in 2011, that the low of this correction is in.  You should always be prepared for a potential test like the April and June lows.

So who is “Sitting in a nest of bad men whisky bottles piling high,

Bootlegging boozer on the west side,

Full of people who are doing wrong?”

“Just about to call up the” TA man…

Nest of bad men can’t tell a head and shoulders pattern from a trading channel and that’s at least one reason they can’t see the bullish long tail hammer in the white dress on the hard right edge.  That’s a blind spot and blind spots make for losing trading.

Well that’s the tune of this TA man!

(click image to enlarge)

The SPX opened near Tuesday’s close and fell to its 1,235 support area in the first hour, formed a hammer on the 5 minute chart and then reversed and rose 25 points over the next 5 ½ hours, closing near the high of the day up +6.29 at 1,260.34.  The VIX was down -1.41 at 23.38 confirming today’s move up.

NDX long tail hammer, bullish harami, below 30 DMA +0.87%

SPX long tail hammer, bullish harami, below 30 DMA +0.50%

INDU long tail hammer, below 30 DMA +0.25%

COMPQ long tail hammer, bullish harami, close below 30 DMA +0.89%

RUT long tail hammer, bullish harami, below 30 DMA +0.75%

Breadth turned positive as advancers led decliners 1.34 to 1 on the NYSE and 1.44 to 1 on the NASDAQ …

Exchange       NYSE        NASDAQ

Advancers      1,733           1,542  

Decliners        1,284           1,066

Index         Change    Close    Direction    Confirmation

VIX               -1.41       23.38       Down           Yes – SPX

SOX             +4.22     379.39       Up               Yes – COMPQ

Leading stocks > +2% on Wednesday included UAL, ARUN, CSTR, RVBD, V, SNDK, DECK, GES, GMCR, HLF, JNPR, CIEN, FFIV, ZAGG, SWKS, JDSU, CRUS, SLW, ACN, NVDA, LVS, NKE, NETL, MCP, HAS, FAS, SWK, IAG, VMW

Losing stocks < -2.0% included TSL, AKS, UCO, WLT, FAZ, PCX, ANR

Earnings This Week

Monday Aug 1= CTRP, HLF, HUM, SOHU

Tuesday Aug 2 = CTSH, EXPD, HSIC, SIRI, COH, FWLT

Wednesday Aug 3 = ATVI, CMCSA, AGU, ATW, ENTR, ICE, WLT

Thursday Aug 4 = DTV, FSLR, GRMN, PCLN, ANR, CF, SINA

Friday Aug 5 = WCRX, WTW

SPX

Resistance: 1,267, 1,278, 1,288

Support: 1,258, 1,249, 1,235

The short term 3 day trend is down.

The six-month trend is neutral.

The twelve-month trend is up.

Trade with the trend of the chart you are trading.

Bullish entry signal is a bounce off support and a break above the high of the low day or a break out of horizontal resistance.

Bearish entry signal is a break of short term support or a bounce down from the 30 DMA or other resistance.

AAPL +3.66 – hammer, bullish harami, above 30 DMA

AMZN –1.74 – lower shadow black candle, close below 30 DMA

BIDU -0.49 – hammer, above 30 DMA

GOOG +8.77 – bullish harami, above 30 DMA

NFLX +2.80 – hammer, bullish harami, potential double bottom, below 30 DMA

PCLN +3.65 – long tail doji, bullish harami, close above 30 DMA

QCOM +0.72 – lower shadow white candle, below 30 DMA

NDX 100 stocks stronger than the NDX include RIMM, SNDK, GMCR, FFIV, BMC, WYNN, CTSH, FAST, LINTA and EXPD.

Stocks weaker than the NDX include VRTX, GRMN, MYL, STX, GILD, SYMC, BBBY, CTRP, SHLD and BIIB.

Stocks to Watch on Thursday

Holding Above 30 DMA

CROX, CMG, CAM, DECK, LVS, SOHU, CDE, SLW, CF, IAG, MOS, CHL, MCP, MHS, FAZ, TPX, GMCR, TLT, CREE, WTW, HLF

Moving Above 30 DMA = 3

SNDK, SWKS, V

Moving Below 30 DMA = 2

ESI, NTES

Staying Below 30 DMA

ANF, ATW, COH, FCX, GS, POT, SLB, WLT, NKE, SINA, SWN, ACN, AGU, DOW, UCO, UNP, VMW, CLF, NGLS, ANR, ATI, CAT, CIEN, CRM, CRUS, CY, DLR, FAS, ICE, JNPR, LDK, NDAQ, SMH, STI, TIF, URE, WDC, AKS, CSTR, DE, PCX, TBT, X, ZION, KKD, NETL, DHR, FFIV, SWK, UNG, ARUN, RVBD, HUM, ENTR, INFA, A, F, GES, HAS, BAC, TSL, UAL, VECO, NVDA, FWLT, JDSU, GLW, IL

Intermediate Term Market Trend: Neutral

Short Term Market Trend: Down