Wednesday, July 6, 2011

Wednesday Market Summary

Today the markets ended mostly flat after briefly trading both lower and higher than yesterday's closing price.

The SPY, a key benchmark, ended up just 16 cents, or 0.12%. It opened the session down 32 cents before dropping to 133.11 and pushing all the way back up to the the key 134 level. Between noon ET and the rest of the day, the SPY traded flat.

10 min SPY chart

On the daily chart, the latest candle is essentially a doji. A doji is formed when the price closes flat after moving both up and down during the day. The SPX index (which is what the SPY tracks) formed an even more defined doji candle. This latest doji candle is in addition to the one that formed Wednesday right next to it.

SPY daily chart

Yesterday I spoke about how a doji candle after a big move up often signals a reversal in trend. I also mentioned that if a second consecutive doji candle were to form, I'd change my analysis. Today we got exactly that. A big up move followed by two flat days is a classic bull flag. This tells me that the market is preparing itself to move upward, or at least isn't adverse to doing so.

Had this pattern showed itself 2 weeks ago, I'd be long the market right now. However, at such lofty levels on the chart I have to leave it alone. Please be aware that bullish patterns at highs and bearish patterns at lows have decreased probabilities of playing out to completion or at all.

This isn't to say that the market won't push up tomorrow--in fact, I'm almost expecting it. The market has been floating up since last week and this latest daily pattern doesn't dissuade me from thinking it will continue to do so.

I'm still holding half positions short in the SPY and the QQQ that I picked up before Friday's sharp rally. The markets are still very extended and are overdue for a retrace. If we don't pull back by Friday, I'll stop out of these positions for a small loss and look to go short again further up in the charts. A push up in the SPY will meet resistance first at 134.30 and finally at the double top at 136.50.

ADP jobs data will be released tomorrow pre-market and it may provide a catalyst for the market to make a move. Stay tuned to this blog and my twitter as I'll be posting about it later tonight.

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