INVESTMENT EDGE
The US stock markets continue to consolidate and digest its huge 2017 year run-up and subsequent double digit correction. The lone exception being small cap stocks as they have moved on to all-time highs. Will the rest of the market follow suit? The benefit of the doubt has to be given to the prior underlying trend but I don't think the answer will be resolved any time soon. Until then, check out this month's Charts on the Move video at the link below ...
There are many recognizable patterns that prices develop in technical analysis but few are as important as island reversals (also known as an “abandoned baby” in Japanese candlestick lingo). An island reversal is a reversal pattern that forms with two gaps and price action in between the two gaps. These gaps tell us that the island reversal marks a sudden, and sharp, shift in direction. Even though they are relatively uncommon, island reversals are potent patterns that warrant our attention. The islands can be formed either at the top or bottom of a stock’s price movement, both indicate the prior trend is done and price has reversed.
The alignment of the gaps holds the key. First, note that a bullish island reversal forms with a gap down and then a gap up. A bearish island reversal forms with a gap up and then a gap down. These gaps overlap to create an island of price action, hence the term “island reversal”. The island is above the gaps on a bearish reversal, and above the gaps on the bearish reversal.
As you can see in the chart below of the Nasdaq 100 index, QQQ, it created a bearish island reversal on Monday when price gapped down below the gap created in the early March move higher. Why islands are important is because traders establishing long positions on the island (and maybe those who initiated on the rise into that island) are now trapped with losses. As such, if price were to move higher from here, closer towards the open gap, you would expect a large supply (sellers willing to sell) to quickly slow, stop, or reverse the advance as those late buyers exit their losing positions. You have often times heard me reference this as “resistance”.
The stock market is in a trading range and looking for a catalyst and there is an important FOMC meeting today, 3-21. It is important because the Fed began increasing interest rates at the last meeting. Traders want an idea of how often and how much the Fed will raise rates this year. The meeting creates uncertainty, which is a hallmark of a trading range. And trading ranges need a catalyst to bust out. As such, the odds are that there will be a big move after the report. Unfortunately, the move can be up, down, or even in both directions. We will only know the answer after the fact. Either way, strap in as I expect some fireworks in the coming day(s) and to discover whether this island top reversal pattern will be an accurate predictor of the short to intermediate term future.
When looking at the US stock market in its entirety, the Nasdaq composite is arguably the most important index. While it is not the broadest measure of the entire market, it does hold the most significant of current technology companies paving our future. As such, the Nazzy typically leads the market, both up and down and a reason I follow it so closely.
With February’s market correction, top callers and psychic hotline workers around the globe begun to ring the bell calling for the end of the stock bull. Of course, anything is possible but the Nasdaq composite is telling us a much different story. As you can see, Friday’s open gapped higher and eventually closed the day at an all-time high. RSI momentum, held above oversold levels during the recent pullback but still has a lot of room to run to the upside before being overbought. Friday’s close also completed a cup and handle pattern which, if the break holds and the pattern completes, points to a target up around the 8245 area.
There is no question bull market will end and someday those same top callers will be ringing their bell once again, eventually getting it right (even blind squirrels find a nut occasionally). I can say with high confidence bull market tops don’t occur when the most important index is braking out to all-time highs.
February welcomed back volatility and our first double digit decline in many, many months. February also marked the end of the intermediate term parabolic blowoff and points to further consolidation in the coming months as I discuss in my latest video
This the Reason for the High Divorce Rate?
Do you think, based upon the Economists data below, if the tradition of the man giving his bride-to-be an engagement ring changed to giving stock certificates would materially decrease the divorce rate? At least they would be starting off on better financial footing (said with tongue planted firmly in cheek)
