Monday, October 25, 2010

Gravestone Doji - A Bearish Day

Today's price action was bearish. The S&P 500 Index opened up with gusto at 1184. 1184 was higher than Friday's close of 1183. Resistance was at 1195 on a weekly chart of the S&P. The S&P 500 Index actually soared up and touched 1196 during the first hour of the trading day. It should be remembered that retail and inexperienced investors populate the first hour of the trading day. Funds from mutual funds also enter the market on Monday mornings. So, the early morning surge was unsurprising.

More telling to me was the market's behavior after the first hour of the trading day. Q: Would the gains hold throughout the day? Q: Would the market sell off throughout the day and close @ its low? By 1:00 p.m. (PST), I had my answer. The gains did not hold. Institutions were selling into the close. It is bearish when institutions sell into the close.

The price action today was a gravestone doji. Gravestone doji is just a fancy way of saying that the market was excited in the morning but lost all of its gains by the close. Market experts consider this to be a foreboding event. It suggests that lower prices are ahead.

The longer the market hangs in mid-air, the more severe will be the drop. This anticipation makes sense. More and more people are committing themselves to higher prices. But they are late to the party. The time to be all in was back in late August. The histogram closed negative again (simply amazing). Even the MACD trend line is now heading down.

Tops are a process. They don't happen all at once. So, you have to look for signs. The signs are everywhere.

Have a good evening!

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