Wednesday, October 05, 2011

Daily Market Commentary: Bullish Reversal Patterns

Today's market was like an Irish summer's day - when all four seasons appear in the one day. The day started with a small gap down. This was followed by further losses before rebounding back to yesterday's close. Then markets took a second spin lower, before a late day surge took indices into (or above) yesterday's candlesticks.

The Russell 2000 demonstrated this recovery the best. While technically it remains weak and hasn't negated yesterday's breakdown, it was able to rally over 6% and see a shift in relative strength from Tech to Small Caps - a bullish development. Any upside tomorrow would put down a new marker for a 'bear trap'.


Next on the list is the Nasdaq. While it lost ground relative to the Russell 2000 it did have more success in creating a new 'bear trap'. Today's huge volume buying comfortably regained support and sets up a potential challenge of the 20-day / 50-day MAs up at 2,512. Bulls may have something to smile about here. It enjoyed a small recovery in relative strength against the S&P, but this should improve in the days ahead.


Providing support for the Nasdaq is the Semiconductor index. Like the Nasdaq, semiconductors were able to defend support and prevent a 'run-on-the-bank' so to speak. Technicals are all net bearish, but Stochastics are nearly oversold and the CCI has already done so.


Also helping the Nasdaq is a potential 'bear trap' in the Percentage of Nasdaq Stocks Above the 50-day MA. While a volatile breadth indicator this is already working from a deeply oversold position. It can only get better from here...


Finally, the S&P did its bit to recover. It was hardest hit by early morning selling, but had done enough by the close to see a bullish piercing pattern, with higher volume accumulation and a 'buy' trigger in on-balance-volume. There was also a significant shift in relative strength against the S&P towards the Russell 2000; a bullish development.


Tomorrow will be about consolidating today's gains and not giving back what was strongly fought for in afternoon trading. Most of the indices will be looking to confirm or create (i.e. Russell 2000) 'bear traps'.
For bulls, today's lows mark a new line in the sand to defend.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com. I offer a range of stock trading strategies for global markets which can be Previewed for Free with delayed trade signals. You can also view the top-10 best trading strategies for the US, UK, Europe and Rest-of-the-World in the Trading Strategy Marketplace Leaderboard. The Leaderboard also supports advanced search capability so you can tailor your strategies to suit your individual requirements.


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