Technical Picture - $USDX Strength Weighs on Precious Metals and Commodities

Markets gapped up on strength overseas, but sellers quickly took control and the opening gap was faded. Not satisfied to simply fill the gap, the bears persisted, and helped along by a stronger $USD, sent prices all the way down to yesterday's gap support for tech and almost a full PD gap fill for the S&P. Small caps were hit even harder still. The only bright spot was the DOW, which managed to end the day on the plus side. Prices started to stabilize and bounce midday, and got a further boost from the FOMC minutes. However, late day price action became much more volatile and after hours, the bears are hard at work.

On the SPX chart above we note that open interest CPC is still too bullish and needs to correct. Today's stick not likely a hammer, more likely a hanging man, but that needs to be confirmed.

Note that the VIX, which has gone virtually ignored for months, is forming a bottoming pattern which looks like a mini inverse H&S.

Yesterday, the dollar held support and today it bounced, holding most of its gains into the close.

Dollar strength meant pressure on commodities and precious metals. Crude carved out a bearish evening star reversal pattern over the last three sessions.

Distribution in gold and silver. Look for more downside if the $USD strengthens. On the SLV chart we see multiple waves of RSI divergence to higher prices. This time I think we will see a deeper correction.

I still have a core swing short position in SLW which I was very tempted to cover at $36.00, but I believe it's going lower, so I'm holding on.

Coal technicals are still strong, but we have a bearish island reversal waiting to happen. Watch the futures in pre-market.

Semis are holding up well, but a correction would be healthy here given the steepness of the trendline.
MOO has already corrected, so I'm expecting a retest of the base. World food shortages are still problematic, and I expect Ags to be one of the leading sectors in 2011.

Commodity Rotation Cycle - In a commodity bull market, precious metals are the first to rally, followed by other metals, agriculture is third and oil is usually the last rally in the cycle. That said, it stands to reason, that precious metals will be the first to correct. Just a thought from a non-expert.

Technical Picture - Late Day Rally Pares Losses from Weak Jobs Report

A firmly negative start on Friday in the wake of the worse than expected non-farm payroll and private payroll numbers (previous month revised lower as well). As we can see from the SPY chart below, price held initially at this week's narrow trading range floor, but the rebound stalled 30 minutes into the day. A second wave of selling accelerated into mid-morning with the SPY unable to stabilize until it almost completely filled Monday's gap. To make matters worse, Goldman cut their 2001 GDP forecast. This left prices trading in a tight, narrow range for several hours. Eventually all that coiling, produced a breakout to the upside as prices rallied in the last 90 minutes leaving the indices with only minor losses.

On the daily we have a either a hammer or hanging man. Keep a close watch on the trendline for a potential breach and some retracement.


If the market weakens, play defense with biotech/healthcare sector. Large caps biotechs such as CELG and AMGN look poised to move higher.

Swing Trade Update

From the RIMM chart above, we see that Friday's strength (bullish engulfing bar) sets up a perfect ambush long. I trimmed my short position by another 25% and tightened the stop as depicted above. Barron's unfavorable article this weekend may help tomorrow.

Day Trade

As mentioned Thursday night, Cramer's ill-timed Mad Money recommendation to buy POT and other sector names, after such a huge move, could provide the perfect storm for a shorting opp. The sector gapped up Friday morning as his disciples blindly jumped in. As soon as prices fell below the PDH, I shorted POT for a nice swoon to fill Thursday's gap. Notice the negative divergence of the RSI to higher prices on the 15 minute chart above.

Summer Time - Basic Multi-TF Patterns

In slower summer time trading, I often find it helpful to look at a longer period intraday chart. It can cleanup some of the noise and reminds me to be more patient for a good setup. I found this setup today on a 30min chart (left chart). The daily chart (lower right) is extremely weak compared to the broad market and has a very interesting pattern on a longer term daily or weekly chart. After the weak OR, the intraday volume contraction was confirming the bear flag and is visible on the 30min and 15min (upper right) timeframes. Range contraction (NR7/NRIB) followed by a hanging man marked the end of the bear flag pattern.

Shanda Interactive Entertainment Ltd ADR (Public, NASDAQ:SNDA)

The first chart is the daily EOD Friday. I was looking to short SNDA below the middle blue line around $55.00.

SNDA gapped down on the open and carved out a hanging man (sort of - long lower shadow). The next stick was an IB in the lower shadow of the HM. The only caveat was the distance of the down sloping 5 period EMA (pink). I decided to take the trade anyway with a stop at PDL. If the distance from 5 ema too wide, stop has to be placed accordingly.

After my entry SNDA printed a doji with long lower shadow, which looked like it wanted to retrace and it did, but it held S1 as resistance and came back down for a fast move to the 50% FE of the late day swing high to the ORL. My target on the second half was eventually reached.

The daily has now carved out a base at $50.00 from a double top. Today's selling on high volume. So we have three consecutive lower closes on accelerating volume - looking for consolidation at the base, prior to BO.

Chinese internet ADRs, as a group were weak today - SOHU, SINA, NTES.

Overbought Profit Taking

The advance stalled when the S&P tested it's June peak. The combination of extended technicals and disappointing outlook from CAT's conference call, and the Fed Chair's outlook for a slow recovery, led to a steady but only modest slide into early afternoon trade. However, no follow through developed with the S&P stabilizing near congestion and bouncing into the close allowing the markets to extend their winning streaks (Nasdaq up 10 in a row) and all majors setting new multi-month closing highs). But the SPY carved out a red hanging man and the S&P a green one. Haning man has to be confirmed.

AAPL and SBUX rally on earnings after hours.

The H&S top in POT which I described last night was broken on the open when price gapped and tested Friday's highs. However, sellers fought back. A bull/bear battle ensued. The initial price action was like a yoyo with wide spikes up and down, but the bears had the advantage as measured by lower highs. Eventually, we reached price/volume contraction and a bearish rounded pattern took shape, leading to expansion on the down side.

MOS forming H&S top intraday at $48.00


CNQ was a NRB at base of support.

Support & Resistance

CAT printed a hanging man at resistance.

V tested resistance at $58.00 in early trade. This was a HCPG pick on Friday - failures lead to fast moves in the opposite direction. My alert was set too high today, so I didn't get into V until the inverse C&H was about to break. But you can see from the chart that today's price action almost mirrors Friday's. So basically, I was able to make the same money twice.

1 minute chart below shows that two bear flags formed along the way so there was opportunity to get in after the initial break.


Last night we said that POT had carved out a nice inverse H&S. I was disappointed that it gapped so wide - into the R-zone. Eventually it printed a series of lower highs, setting up for a gap fade and fill.

ABX - the base from yesterday's inverse H&S held as support for most of the session, but it finally gave way for nice short into the close.

Last night I said price has a memory and the CAT, V and ABX trades prove the point. Remember to set alerts at key support/resistance levels.

And what's up with this Trader Transaction Tax? Sounds like some people are getting carried away, blaming Wall Street and the regular Joe day trader for everything that's gone wrong with the U. S. banking system.

Bearish Hanging Man Reversal Pattern

Following last night's trading post, we had some interesting questions on the correct timing and entry of the bearish hanging man candlestick reversal pattern.

Let's go over Steve Nison's criteria:

We recognize both the hammer and hanging man (HM) from:

• the real body is at the upper end of the stick's range;
• the lower shadow should be at least twice the length of the real body;
• No or very tiny upper shadow.
• The longer the lower shadow, the shorter the upper shadow and the narrower the body, the more meaningful the pattern.
• In terms of stating the obvious, when used as reversal patterns, the hammer would come after a decline and the HM after a rally.
  

My notes - this second last point is a problem when it comes to stops, that's why I don't like to trade off of a wide HM or hammer. I usually wait for a lower risk entry point. I also prefer my hammers to be green and my HM to be red, but Nison says color is less important.

Confirmation of HM:

Nison says that at a minimum we need a lower open on the following stick, below the real body of the HM, but he usually recommends a close beneath the HM.

He also mentions that the pace of the rally should be slackening. The best way to determine this intraday is with the RSI which measures relative strength.


On the POT trade yesterday, which carved out 2 HM, the first of which was foreshadowing a reversal, we clearly see a negative divergence of the RSI to higher prices relative to the previous session.

On the FWLT chart, also from yesterday, we see the continued strength in the RSI when price prints a HM early in the session. This would not have been a good candidate to short following HM because the rally has yet to show signs of slackening.

The RIMM chart from today, shows 2 HM after a retracement. The RSI is clearly not enthused by the higher prices and this sets up a perfect short. If you use volume as the indicator, the entire retracement took place on declining volume.

Profit Taking - Potash Corp./Saskatchewan (USA) (Public, NYSE:POT)

POT took out PDH and extended 50%, printed a big hanging man, retested the highs but couldn't push through R2. The second hanging man, strategically placed at R2, provided a very good clue that POT was going to come into some profit taking.

SCO and BIIB were from the gapper focus list. BIIB was a coil and move back to ORH, followed by a long, almost painful, wait for the anticipated C&H to develop.

SCO was an ORBO with extension following the gap fill consolidation.

SLB, also from the gapper list, was a good intention for a H&S BO, but I missed the entry. Hope you got involved.

The key criteria for H&S tops are big volume on LS and Head and relatively little volume on the RS. SLB meets the criteria and delivers a fast trade - gap fill and perfect measured move - 100%