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The Moving Averages Acted As The Resistance This Past Week

Market Direction – The major advantage illustrated by Candlestick signals is the ability to see what the investor sentiment is doing at critical technical areas. As described in the previous newsletter, the Morning Star signal in the DOW was a clear indication that the buyers had stepped in. Viewing the chart also provided the first potential resistance level, the 50-day moving average. What does that projection provide for the candlestick investor?

The Morning Star signal is a strong indication that the downtrend has reversed. Is this a major reversal or a bounce in the downtrend? At the point of seeing the Morning Star signal, that question cannot be answered. However, because of the fact that the 50-day and 200-day moving averages are in the vicinity, they become the obvious targets. An obvious target is any technical level that will have a large number of technical investors viewing it as a possible support or resistance level. These levels are not difficult to analyze. A trend line or a Fibonacci level, a moving average, anything that makes for a level that will have a lot of buying or selling interest.

As seen in this week's DOW chart, the 50-day moving average was the clear resistance level. Notice how the highs of the two Doji's were stopped right on the 50-day MA. The fact that the Doji signals were appearing and they were just touching the 50-day MA should have been an alert that the buyers were not able to push through the 50-day. By the time the buying did push through, the stochastics were getting up into the overbought area.

The last Doji, forming right at the 50-day MA was another day of indecision. The fact that the stochastics were now turning back down should have been another alert. As you would have seen in the daily comments, that was the time that it was recommended to get out of the charts that were looking toppy. Also, you should have noticed that more short positions were being recommended. Having the short positions in the portfolio added some good profits as might be expected. The combination of longs and shorts in such a quick downturn is the way to augment keeping a balanced portfolio during a potential turn and being able to profit from the down move by not having to switch a whole portfolio at one time.

The pattern revealed in the DOW chart is called the “Blue Ice failure”, as named by Dave Elliot of Wallstreet Teachers. The explanation of the Blue Ice failure is that once a trend comes through a moving average, July 1, 2004, it will come back up to test it. Usually the first attempt will fail. When it does, as seen by the signals, then it will breach the previous low. What is the next target? The 9700 area of the DOW is where the trend line shows a potential support level. The stochastics are now getting into the oversold area. This provides the set up for watching for a bottoming signal.

Two large days to the downside indicate panic selling. A gap-down on Monday's open would be a perfect set-up for buying, especially if the DOW sold off to the 9700 level. Panic selling, a gap-down open in the oversold area, would all be the signs that a candlestick investor would want to see. That is the set up for buying at the bottom. The NAS already produced a gap-down on Friday, the stochastics getting to the oversold region. Start looking for a buy signal, but maintain the short positions until a strong buy signal comes into this market.

Understanding the moving averages as support and resistance in candlestick charts.


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