Friday, August 12, 2011

definitely going to enjoy the silence this weekend!

I think everyone in the active trading community is happy it is finally Friday after hours.  If they are anything like me, they will enjoy a nice quiet uneventful week, if they survived this week, then they definitely are due the short vacation!

Today was a continuation of what we saw over the past few days and what I expected.  A very healthy gradual rise off the lows.  I actually bought some stock yesterday late in the day and was planning to buy more today on weakness, but the market never pulled back enough. 

The market is 'stair stepping' now (see image below), where two days ago it established a base, and the yesterday it 'stepped up' (prices rose), then today it more or less sat flat.  This is a very healthy move.  As I mentioned previously, after such a decline you generally do not want to see the market snap back, but rather slowly rise.  People like stability, not wild swings ... so it is much healthier for the market to rise slowly vs. a sharp upward rise.  We have a lot of wounds that occurred over the past month that need time to heal.  And stair stepping is a great way for that to occur.  You get a rise in prices, then the market settles down (consolidates) and basically is flat for a few days, then takes the next step and continues the process.  Each step forms a new base to stabilize on (support).  SO ... all in all not much to say today, except I'm seeing definite healing going on.

One interesting note on the Russell 2000 (small cap stocks), the market is forming what is called an ascending triangle (see image below).  This usually is a trend continuation pattern ... basically continuing the upward movement, BUT obviously not always.

The way the pattern works is that you have higher lows and lower highs, forming a wedge.  What you usually see is prices getting less volatile (the highs and lows are closer) as it gets closer to the end of the wedge.  They call this coiling up ... the prices are getting tighter and tighter like a spring being pushed together.  And ... generally when you get to the end you get a wild (springy) movement ... like a spring bouncing out.  So, the prices stay within the wedge usually until the end, building more and more energy ... and then the prices spring out.

An ascending (or descending) triangle also tells you when (usually) something is going to happen.  And as you can see from the image below, it's decision time ... on monday we should see another aggressive 'stair step' up OR ... a break to the downside which most likely will test the lows that we had last week.

An important criteria of a triangle pattern is that volume should dry up as the price gets close to the end of the triangle (before a breakout), and then you should volume pick up noticably at the penetration (the 'breakout') of the triangle. Volume obviously shows how many transactions are taking place, so an increase in volume in a strong up move would show buyers are aggressive.  Although volume is not pictured in the image below, it definitely is 'drying up' as this pattern unfolds.

Anyway thought I would give you a little technical analysis 101 to properly put you to sleep :)

As I said above, usually this pattern is a continuation pattern, BUT ... not always.  So, if we see a break to the upside, we should see a nice move (1-2% minimum) on Monday and another step in the healing process. 

Have a wonderful weekend, and enjoy the lack of turmoil!!!

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