| Technical Analysis NASDAQ SP500 $USD OIL Diamond Bottoms |
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| Thursday, December 7, 2006 |
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Nightly Update - $SPX, $COMPQ, $USD, & $WTIC
The S&P 500 Large Cap Index ($SPX) - Daily chart
Today was more or less a non-eventful day. The $SPX made new 52 week highs today at 1418.27. However, the $SPX then reversed course and declined steadily the rest of day along with the rest of the market. The $SPX closed down -0.40% at 1407.29. It really didn't go anywhere. The $SPX has only had 2 distribution days within the last month. Nevertheless, volume was on the heavier side and closed on the low of day, which could be a possible sign of distribution. The $SPX could pullback to 1387.42 and still maintain it's uptrend channel. That is a good 20 points away form the uptrend line and yet it is also 20 points away form the top of it's channel. The $SPX is trading in the middle of it's channel. What to do? Well, when an equity or index is trading in the middle of a channel all you can do is sit and wait for it to tell you what direction it is going in, up or down. Sit on hands for now and do nothing. Pullbacks to the 34 EMA, which act as magnets, are signs of a healthy market, and do not mean that the uptrend or market rally is over. Keep in mind that equities often need to consolidate or rest before continuing on up to make higher highs. The RSI and PPO are showing signs of slight bearish divergence, and the Stochastics look toppy.
The Nasdaq Composite ($COMPQ)- Daily Chart
The $COMPQ also declined today. Today the $COMPQ declined 0.74% to close at 2427.69 on slightly heavier volume. Today's decline represents the third distribution day for the index within the last month. As you can see by looking at the chart, you will see that the $COMPQ has been trading in a parabolic uptrend channel since August '06. As I always say, "Parabolic is not a pattern." When a chart is parabolic, it becomes over extended and needs a pullback/breather before it heads back up. As mentioned before, a pullback to the 34 EMA is healthy. However, you will see that the 34 EMA is quite a bit lower than the uptrend at 2398.58. We won't know if the $COMPQ will break the uptrend line or hold it until it actually does. Ultimately, the indicators and oscillators are not showing enough bearish divergence to indicate that the wave structure is broken.
The US Dollar ($USD)- Daily Chart
The dollar is bearish and it really needs to be tanking. The $USD is in a bear flag. The $USD is oversold but this is often when equities/currencies can become more oversold. It is in a 1-2-3 bearish trend reversal.
Oil -Light Crude-Continuous Contract (EOD) (WTIC) - Daily Chart
The daily chart of WTIC shows that Oil has completed it's counter trend wave 3 to 4 pullback. Oil has broken out of it's diamond bottom pattern and is now in a move up to wave 5. Oil looks to make another move up to test it's previous highs around $70.00. Indicators and oscillators are bullish, and stochastics are bull flagging, but the PPO is showing bullish divergence. Note the bullish cross of the moving averages. There are a lot of catalysts that will be coming out next week that may push this sector up and also cause some volatility within the sector. These are only a few of the portfolio stocks have been recommended for the Oil sector: SU, UPL, OXY, VLO, BRY, and CNQ. Please look at the rest of the portfolio for other oil sector stock plays.
It looks like the market took the day off like John. :)
Transcribed by Daisy Friend
Diamond Bottom Pattern
Implication
A Diamond Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend.
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Description
Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern.
The Diamond Bottom pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The technical event occurs when prices break upward out of the diamond formation.
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Trading Considerations
Duration of Pattern
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.
Inbound Trend
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.
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Criteria that Supports
Support and Resistance
Support can be found at the turning point of the lows and resistance at the top peak of the Diamond.
Moving Average
Watch for the 200-day Moving Average to flatten out. Then watch for the 50-day Moving Average to cross above the 200-day Moving Average. This should signal the breakout.
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Criteria that Refutes
No Volume
A lack of a volume throughout the pattern is an indication that this pattern may not be reliable.
Short Inbound Trend
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.
$SPX
NASDAQ
$USD
$WTIC
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