Tuesday, August 16, 2011

Doji candle signals indecision for SPY

Today the S&P 500 (SPY) daily chart ended in a doji formation. This is a classic sign of indecision in the markets.

To match this indecision, we have (possibly) the beginnings of bullish consolidation within an overall bearish wedge pattern. Note the sharp down-move followed by a sharp up-move compared to the sideways trading of the past two to three days.

What this tells me is that the market is poised to eventually move lower (bear wedge), but may need to move higher before doing so (bullish consolidation). If this is the case, I would expect a push into the 50% or 61.8% fib retrace levels before pulling back.

Tomorrow's trading will be the ultimate test of this thesis and if there is a significant pullback I'll revise my analysis. The ideal scenario is another day of sideways trading followed by a push into the upper fib levels and moving averages. But rather than to go long, the better risk reward play here is to go short at the resistance.

As the chart unfolds, I'll be updating my forecast. Check back here and follow me on twitter for my latest thoughts.

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