Friday, November 4, 2011

dojis and triangles

The market seems confused, doesn't know if it wants to go up or down...

We had what is called an 'inside day' or in candlestick speak, a 'harami'.  Basically it means that the price action today was 'inside' of the price action from yesterday.  doesn't mean anything significant, except indecision.

I am also seeing doji patterns on all the major indexes, which also signal indecision.  A doji candlestick means that the opening price and closing price during the day were basically the same.  Think of it as a giant tug of war going on, where the price starts in the middle ... moves up, moves down, then closes again in the middle.  So, for now we are equally weighted between the bulls and the bears.

Very conflicting signals with my end of day analysis, some show bearish tendencies and others show bullish tendencies.  But one of the strongest bullish signals today is that the VIX had a nice decline even though the markets also declined.  A declining VIX can imply bullishness in the market.  The VIX is widely considered a measurement of the fear in the market, the lower the number, the more bullish things generally are.  Usually the VIX moves inversely with the market ... market goes down, VIX goes up (more fear).  So ... again conflicting signals ... the market went down and the VIX also went down.

looking at pure price action let's break it down further looking at a few indexs

Nasdaq- The nasdaq ETF has been in a trading range (between roughly 2600 and 2700) for a few weeks and currently is at the upper end of the range, but can't seem to get over the hurdle.  It opened and closed above most of the shorter term averages, but seems to have trouble closing above the 200 day average which isn't surprising given the correction we just went through.  If we can hop above this range, I think we are poised for a nice move higher  ... possibly to new highs before the end of the year.  I actually have some buy orders slightly above 2700 ... so if we are able to clear that hurdle ... I will be long.    Trading ranges are healthy ... frustrating, but healthy.  Think of it as building a base for us to be able to spring off of, granted we could spring either way, but generally speaking the trend continues in the direction of the previous trend which was up.  With that said, it certainly could go in the other direction and retest the lows of the year (hence the reason I am waiting to buy until we clear the resistance hurdle.

SPY and IWM are also nestled right above the shorter term averages and both have formed a beautiful symmetrical triangle over the past few weeks (each easily seen using 15 minute candles - see the image below where each green or red vertical line (candle) represents 15 minutes of time).  A triangle 'usually' resolves in the direction of the prior trend (which was up), but doesn't always.

Triangles are consolidation patterns where both parties (bulls and bears) are basically battling it out (think tug of war again).

Once price breaks out of the triangle it usually moves aggressively as one party enjoys their victory and the other party gets stopped out (which adds fuel to the move).  Think of a bull and a bear both anticipating the outcome of the triangle ... if the bull wins ... he buys more and his friends join in, while the bear closes his short position (accepting defeat) by 'buying' shares to close his short.  So ... both bulls and bears buy ... forcing the price to move quickly up.

So, how do you trade a triangle?  Well ... the best course of action is to sit on the sidelines and wait for one party to win, then buy.  Call me a wimp, but it is much less bloody (less potential for loss).  SO ... I have buy orders above the triangle which will activate IF we break out to the upside.  I'd rather make money than be right, and so even though I think the bulls will win, I'm not putting my money on the table until we have a definitive decision.  If the bulls don't 'win' ... I lose nothing since my orders will never trigger.

Anyway, have a great weekend ... enjoy some time away from the computer ... I know I will!!

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