Bears Gathering At Resistance For IJR

02/22/05 09:01:59 AM

by Arthur Hill

The big trend remains bullish, but a recent gathering of bearish candlesticks near resistance may limit further upside for the short term.

Security: IJR
Position: Hold

The iShares S&P Small-Cap Fund (IJR) is an exchange traded fund (ETF) based on the S&P 600 SmallCap Index (SML). Even though the price charts are virtually identical, I find the ETF better for candlestick patterns because it is based on an actual opening trade. Even when stocks are poised for a big gap on the open, SML and other indexes usually open near the prior close and then move in the direction of the gap. In contrast, IJR opens with an actual trade and gaps when stocks are poise to gap high. This makes for more robust candlesticks.

Turning to the price chart, we can see four bearish candlestick reversal patterns between 160 and 165. Resistance at 165 extends back to the December 31st high and was recently confirmed with a reaction high in early February. This is the third attempt to hold above 160, and the candlesticks suggest that another failure is in the making.

Figure 1: IJR. The red ovals point out the bearish candlestick reversals. First, the S&P Small-Cap ETF formed a harami in early December, and this foreshadowed a shallow pullback to 156. Second, the stock formed a shooting star and a long black candlestick to ring in the New Year. This foreshadowed a decline to 153-154. Third, the stock formed two indecisive candlesticks and then a long black candlestick on February 9. IJR recovered immediately, but formed a bearish engulfing over the last two days. Further weakness below 160 would confirm the bearish engulfing.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The red ovals point out the bearish candlestick reversals. First, the S&P Small-Cap ETF formed a harami in early December, and this foreshadowed a shallow pullback to 156. Second, the stock formed a shooting star and a long black candlestick to ring in the New Year. This foreshadowed a decline to 153-154. Third, the stock formed two indecisive candlesticks and then a long black candlestick on February 9. IJR recovered immediately, but formed a bearish engulfing over the last two days. Further weakness below 160 would confirm the bearish engulfing.

The larger picture shows a potential double top with resistance at 165 and support at 152. "Potential" is the keyword, as this pattern would not be confirmed unless the stock breaks below key support at 152. The early signal would be a move below minor support at 160 and a signal line crossover in the moving average convergence/divergence (MACD). Note that MACD has a large negative divergence working and further weakness would be quite negative.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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