Today’s big white bar on strong volume was a follow-through day, confirming the rally that began last week (see the “Abandoned Baby Part Dux” post from 5/17/04). We blasted back above May’s range top around $35.5, shooting right through the 200-day and 20-day moving averages. The main black mark today was the volume, which should have been higher. Therefore, we have some stink on this thing. Still, the Cubes could run up to the top or tier range at $37 or so. Stocks and indexes could finish bases with nice handles and breakout, or we could fail at the top of the range and head back down. Personally, I won’t be chasing new long positions right here, although I did unwind some short positions today. I prefer a multi-day bout of fear and capitulation before getting seriously long again and the needles on my gauges just didn’t get there completely. We did get some mutual fund outflows when we touched what many consider extreme levels on some sentiment indicators, such as option volatilities, put/call ratios, A/D readings, and the number of new 52-week lows. We also got oil and gas prices splashed across the front pages. We will see! Gotta be fast if you want to trade this volatility!
As shown on this chart, the Nasdaq’s 20-day moving average has crossed below its 200-day moving average only three times in the last four years, the most recent being this week. You can see that in the past these crossovers have lead to tradable market declines. Of course, history doesn’t always repeat itself, but it often at least rhymes. Note: this chart shows the moving averages only so it’s easier to see the crossovers.
Only have time for a quick post today. As shown above, the Cubes — and many other stocks and indexes — gapped up at the open on bullish news from HPQ and some others, set the day’s highs and tested the 20-day EMA about an hour later, treaded water on light volume for a few hours, then turned tail around 2:00 and sold off hard into the close, basically ending at the day’s lows. Throw another red flag onto the pile. By the way, the Nasdaq closed below its 200-day EMA again after trying and failing to retake that level for the past days. I’m running out of red flags over here!
Today’s volume seems suspiciously light for an upside gap off of a possible reversal formation. At about 95 million shares, it was the lowest volume since 4/27/04 (circled on the chart). And today we also got a candle with a tallish upper shadow, at least relative to the trading range, which was tight. The same “low volume off the possible reversal formation and tallish upper shadow” thing happened last week… and the following day we undercut the lows (but put in a huge volume reversal candle). Both today’s and last week’s meek volume and candle contract with the upside gap off of the three day island formation that set the March lows (see chart). You see the nice pickup in volume and large white candle on that day? That is how a rally kicks off! We’ll see what happens over the next few days. Pop, pop or fizzle, fizzle?
Decisions determine destiny.
-George Patton, U.S. Army general
Exactly one week ago I posted about a doji candle and possible abandoned baby formation (circled). It materialized with the gap up open the next day, but the rally subsequently failed and undercut the doji lows two days later, only to close strong for a big upside reversal, launching another rally attempt. Today is a mixed signal: we undercut last week’s intraday lows but closed above them (good), and we closed below the 200-day EMA for the first time in over a year (bad). You would think the undercut and close below the 200-day EMA would put more fear into the market, but it did not (at least not authoritatively). For example, QQV and VXN took out the March highs, but VIX did not. The May 7th employment report looked a little extreme, but much of that was bonds, closed-ends, and preferred taking out their lows. That suggests that more fear may be necessary to cleanse things before much more than a snap-back rally can develop. So today’s doji and potential abandoned baby show hesitation to the downside, but the close below the 200-day EMA and fact that fear may not have spiked enough are important warnings for any bulls out there. This could be easily turn into a big-time volatile options-expiration week!
Well, on Wednesday Jack in the Box beat earnings and raised guidance, gapping up the next day only to sell off and close at the bottom of Wednesday’s and this week’s price range. Zooming out a little bit and looking at that big 5-point, high volume white candle five weeks ago raises the question, “Wha happen?” That’s when the company raised its guidance for the quarter and year. Since hitting that high JBX has retraced about 2/3 of the move, checking back to its 50-day moving average. Both the retracement and 50-day average can be support areas. However, though this weeks gravestone-looking, large upper shadow candle is a warning sign. The other times something like this occurred above the 10-week EMA are circled on the chart. You can see that on previous occasions the long upper shadow candles came after rallies and resulted in short-term correction. What’s different this time is that JBX has spent the past 6 weeks quietly correcting. I guess the point is that things could go either way, especially with the market in a volatile mood.