Obviously there was no follow-through on Thursday afternoon’s bounce. The S&P and Nasdaq both made new 2006 closing lows.
I see a lot of people taking about the hammers made Thursday. One thing that I don’t like about Thursday’s candles is their long lower wicks. Whenever I see hammers with extremely long lower wicks I worry that the people who bought at the lows, and are now sitting on nice gains, will become sellers. That was definitely on my mind Friday simply because it seems that people like to get flat (especially) ahead of summer weekends. Also, as I wrote in yesterday’s watchlist, I was wary of the 200-day moving average on the S&P 500. It never did make a convincing move above the 200 DMA and I called it a day just before noon without making a single trade.
Hammers are my favorite reversal pattern but I always look at them in context of the overall trend. Hammers define support and signal a potential reversal. (According to Steve Nison a reversal doesn’t have to be from down to up, it can be from down to sideways.) The hammers that I like are the ones that occur on a pullback to an existing upward sloping trendline or moving average. A hammer occurring at such a place gives me an indication that the prevailing trend (up!)is about to resume. In my opinion the hammers that we had on Thursday aren’t signals to go long, they’re warnings to bears to take their profits.
The hammers I like to trade off of should also have wicks that are just a few percent long. I don’t want the wick to be too long because my stop is going to be at the bottom of the hammer’s wick.
As for Monday, I’ll probably key off of the break of Friday’s range. I Suspect that we’ll get a bounce next week but I want the S&P to break its 200-day moving average before I step in. Also, it’s expiration week and while I can never figure out what effect expiration will have there are a lot of recently purchased puts out there. The ‘max pain’ move would be for a (big?) rally. Let’s see if it happens…
No changes to the trend table.
| Trend | Nasdaq | S&P 500 | Russell 2000 |
| Primary | LA | Up | Up |
| Intermediate | Down | Down | Down |
| Short-term | Down | Down | Down |
(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
LA Indicates a Lateral trend
Thanks Mike for sharing your insights about hammers !
Nison’s Candlesticks did start my TA journey about 3 months back, but i quickly got discouraged because i used to trade “against the trend” based on a bullish candlestick. Stage two for me was a foray into the various indicators and “trend following” and now I guess I am coming a full circle now with a renewed interest in candlesticks!
I would love to know your opinion on divergences – would you trade on the basis of a strong divergence (MACD Hist + Stoch) before a trend has been established (ref. the few trading examples at the end of “come into my trading room” by Alder)
Thanks and keep up the excellent work !
After watching the mining stocks cop a hiding over here in Australia and then having Bernanke come out and make his comments on inflation I have turned bearish.
And I think the Australian stockmarket will follow the lead of the US, just like your charts show.
Ganesh,
I probably would not trade against the trend given a strong divergence. But again, that’s just me. If that’s your system and it works for you, then so be it.
I haven’t read Elder’s “Come into my Trading Room” yet so I can ‘t comment on his work.
Mike,
You are doing a wonderful job of sharing your knowledge with others. I was searching for a good blog on Trading and finally I found yours via internet search. Your blog is very very useful for beginners like me.
Keep up the good work.