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CANDLESTICK CHARTING


NASDAQ Runs Into A Wall

12/20/07 08:44:45 AM
by Arthur Hill

After a nice reversal and breakout in November, the NASDAQ formed a massive bearish engulfing formation and is suddenly looking vulnerable.

Security:   $COMPQ
Position:   Hold

The bearish engulfing pattern is a short-term candlestick reversal pattern that requires confirmation with further downside (Figure 1). The pattern forms when the open is above the prior close and the close is below the prior open. A long black candlestick forms and this candlestick engulfs the prior candlestick.

FIGURE 1: $COMPQ. The bearish engulfing pattern is a short-term candlestick reversal pattern that requires confirmation with further downside.
Graphic provided by: MetaStock.
 
In this case, the long black candlestick engulfed the prior three candlesticks. The blue box shows the open and close for the long black candlestick. The prior three candlesticks were engulfed, and this is quite a reversal day. One day of selling pressure erased the gains of the last three days.

Even though this reversal day looks most ominous, confirmation is usually required for this pattern. I am looking at support from the December 4th low and the 5-35 price oscillator (Figure 2). A move below 2613 would break support and forge a lower low. This would be a bearish price action.

FIGURE 2: $COMPQ. A move below 2613 would break support and forge a lower low.
Graphic provided by: MetaStock.
 
The 3-35 oscillator moved back into positive territory last week but stalled this week. A move back into negative territory and back below the signal line (10-day simple moving average) would be short-term bearish. This would also confirm the bearish engulfing pattern, and I would then expect further weakness below the November low.



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.

Title: Editor
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Date: 12/20/07Rank: 5Comment: 
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