Friday, March 13, 2009

Technical Picture In Stocks Becoming Bullish

The market closed firm with the S&P up over 10% for the week. I found this week's price action to be very interesting as the technical picture seems to be favoring the bulls over the short-term.. Many of the stock indices put in a candlestick formation that is known as a weekly bullish engulfment pattern.

A bullish engulfment is a reversal pattern which suggests that the current trend may either reverse or move sideways for awhile. In this case, that means we may stocks move higher in the coming weeks.

If you look at the above chart of the weekly S&P(SPY), you will see the bullish engulfment as well as the MACD divergence that has formed. I also pointed out with red arrows 3 other bullish engulfments that have formed last year. Two of them were profitable with a move that lasted about 8 weeks. The bullish engulfment that formed last October did not work and failed to identify a trend change. Nothing is perfect but I've found engulfing patterns to be about 60% accurate but when you combine them with other tools and methods, they seem to be way more accurate and much more profitable. In the above chart, we now have a bullish engulfment pattern COMBINED with a MACD bullish divergence which in my opinion increases the odds of the market moving higher over the short-term.

Confirmation of the bullish engulfment will be if this past week's high is taken out next week. In other words, the market needs to move above the high of the bullish engulfment. Does this mean the bear market is over? Well according to my work with the 4 year cycle which you can see in the sidebar at the top, prices are expected to move lower until 2010! I think we'll see the market rally for 8 weeks or so which would probably set up a shorting opportunity. It all depends on the size of the bounce that we get. Let's take one day at a time and see if we bounce at all!


Anonymous said...

Ties in with seasonality - lighten up by May or so, and then wait and see!

Anonymous said...

whats the outlook on the currencies?thanks

Paul said...

I would look for any rallies to not sustain themselves and I think a chopping formation that drifts down is probably what will see next.


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