Friday, April 30, 2010

Bearish Engulfment - Stock Market

Well, it's the end of the week and that means it's time to look at the weekly charts. Above is a weekly chart of the S&P500 (SPY) with about 1 year's worth of data. It's pretty obvious that stocks have been  in a strong uptrend since last summer but now we are seeing our first warning sign.

In the above chart you'll notice that the S&P has just formed a bearish engulfment pattern which is a reversal formation.  When I see an engulfment pattern (especially on the weekly chart), I pay attention because it means the current trend is about to either move sideways or reverse.

If this bearish engulfment pattern does indeed cause the market to reverse lower, the most obvious downside objective would be a test of the trendline and support which comes in around the 114 to 115 area.  For now, lets take one day at a time and see what happens.


Don's "Trading-In-Action (TIA)" said...

Kevin, it does not help traders in any way to comment on a outcome retrospectively because we can all see for ourselves that the market is indeed undergoing some potnetial corrections with a bearish engulfing candle. What diffrentiates a good trader from a mediocre one is to be able to spot a potential change of trend before it occurs and to take a calculated r/r trade in your favour. Trading on hindsight will always be right cos we are commenting on the known outcome which in my opinion does not contribute much to improving our trading skills.

Kevin said...

How is my comment in retrospect? The high of this whole move in the stock market was made just days ago! How much more timely would you like my warning to be? If you are looking for forecasts of tops and bottoms in the market before they actually begin to materialize, I suggest you read another blog...actually I might also add you should go back to paper trading because picking tops and bottoms is a losers game which I think is something you may find out the hard way.

Jeff said...

Well said, Kevin.

iliketorunaftermidnight said...

He's pointed out a signal (engulfing candle) to a potential outcome (continued lower), and a potential target. That's not hindsight.

Anonymous said...

Don...u moron, if you hadn't opened your mouth we wouldn't have known what an idiot you are. -CK

Anonymous said...

Hilarious. Kevin, great observation and commentary. Don, I am a professional trader at a hedge fund and I can tell you that I have been following Kevin's blog for years. His insight is timely, often dead accurate and when he is wrong, he is the first person to admit it. I am willing to bet that there are very few people on this site that feel that Kevin has done anything other than add enormous value to their trading with his market insight. Stick to your day job Don. I hope touting the merits of Sorafenib serves you well.

Onto more important thing... Kev, seems like you are getting a breakdown in certain sectors already. Basic Materials been terrible this last rally and have been selling off precipitously after earnings. Furthermore, this tax increase on BHP and Rio Tino in Australia cant help their cause. Ags and banks have also not been participating. As a matter of fact, ever since JPM has had earnings, it has done nothing but go down. I have been shorting opportunistically up until this point, but agree with you that now with this bearish candle in the weekly chart, we could see a considerably move lower. I am looking to add to what I have (I am unfortunately not as sized up as I would like) and will focus primarily on materials, ags, financials and select techs.

Keep up the great work Kevin. I am a huge fan of this blog.

d said...

Very much sppreciate your posts and i stop by every day.

However some things are confusing. Re the TLT short said the trade didn't trigger and so you didn't lose any money when it spiked up.

However when i look back at the original post, there was no mention of a trigger.

Kevin said...

Hello D,

Here is what I said in my post regarding a possible short in the bonds.

" I'll be watching TLT for a possible short trade here. What I am looking for is for the stochastics to close back below the 80 level. "

If you look at the chart of TLT, you will see that the bonds went straight up since that post and the stochastics never really rolled over with a decisive close below the 80 level.

I guess you missed that post D so here is the link:

d said...

Thanks for the clarification.

Anonymous said...

Anonymous, thank you for your "kind comments". Well, do as you please and as a hedge fund manager & a professional trader, i am sure you are making tonnes of money for your clients. Continue wiht your excellent job. Since i do not agree with the style of trading, i will take your word for it & leave this blog. Seriously, i should mind my own business and do what i think is right. All the best!


This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Trading and investing involves high levels of risk. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.
Technorati Profile Finance Blogs - Blog Top Sites