Wednesday, October 14, 2009

Double Top Setup


While Intel closed higher today, it closed at its lows for the day, which is hardly a ringing endorsement after the earnings report. Intel is now overvalued on the daily and weekly charts and fairly valued on the monthly charts. One would expect some profit taking and consolidation at this point. The SMH has completed a 5 wave move up from its October low, which is also signalling that at the least a breather is coming if not a correction.

Even though the Dow got all of the attention today by hitting the magic 10,000 level, the action in the Qs was the real story. Notice in the chart above how the volume today was 1/3 less than at the 9/23 high as the Qs tried to breakout, but failed to close above the 9/23 high. This looks like a textbook double top. Only a continuation on higher volume will change that. My preferred entry technique is to go short on a sustained move below the lower of the low of the previous high or of the breakout day. In this case, that is 42.38, but yesterday's low is 42.37, so that is a possible short entry point. The first target is the October low at 40.72. The second target is 39.30.

For those following the MACD negative divergence sell signal, today's positive MACD cross need not be a signal to exit short positions. Gerald Appel points out that as long as the MACD itself does not move above its previous high, the position is still valid even if price moves higher. Of course position risk limits still apply, but the idea is that as long as the MACD does not surpass its previous high, the market is just setting up another possible negative divergence.

I have also highlighted the first five days of the last 3 months. For those who are interested, it may be worth developing a trading system around the opening five day range, as the probability of hitting the 61.8% extension above or below the range is quite high. I don't have exact figures, but it is probably in the range of 75% to 83%, well worth the effort of testing it.

5 comments:

dave said...

Craig,

I see what appears to be conflicting depictions of Hanging Man & Inverted Hammers in sites about candlesticks.

Am i correct that the color of the body does NOT matter in either case ? IOW, it does not matter whether the open is above or below the close. What does matter is that the body is small & the tail twice as long.

Btw, i think someone was posting delusional bullish posts under my name yesterday. :) Upon greater reflection i do think we're in a topping process that will be complete by Monday.

Regards,
the sane dave

dave said...

"While Intel closed higher today, it closed at its lows for the day, which is hardly a ringing endorsement after the earnings report."

That was Intel's 10th day up in a row. Intel has only been up 10 days in a row 4 other times in its history. I think Weds action was perfectly understandable.

R. Craig Pritchard said...

Definitely agree that Intel could use a rest, but the point I was trying to make is how often these great earnings reports go hand in hand with tops, whether they be shorter term or longer term tops.

I think INTC is going to its 200dema, where it could be a great buy.

R. Craig Pritchard said...

With regard to the candlesticks, the patternsite.com has some good analysis. The results are not what many believe.

The biggest thing is confirmation. The candlestick formation by itself doesn't mean anything if there isn't follow-through.

dave said...

SMH in the downside lead. It had a Hanging Man Weds & beautifully confirmed on the downside yesterday.

I don't know if it's too many days, but with its gap down today SMH has a 4 day Island Top.