Oh No! Not Another Baby With A Poopy Diaper Pattern!

Random Thoughts

The Ps (S&P 500) probed new highs but then sold off hard. This action forms an outside day down at new highs.

I’m sure the candle (candlestick charts) people are all excited. I think this what they call a “Baby With A Poopy Diaper” or something like that.

True, every now and then a 1-bar ugly bar will turn into something much bigger. However, trying to trade off of something that works “every now and then” is a recipe for disaster. Yes, it was an ugly day. My point is to not to get too caught up in one ugly day. I occasionally pick on the candle people since it seems to always be a top, or bottom, or something. Sometimes, it’s just a bad day.

So how bad was it?

The Ps lost over ½%. The loss isn’t that big of a deal but it is somewhat concerning that they probed higher first to make the aforementioned outside day down at new highs. Hang on Big Dave. Are you talking out of both sides of your mouth? You just said no to worry about 1 bad day.

There’s always something to worry about. My point is, do not call the mother-of-all tops every time it looks a little cloudy. Avoid “Chicken Little” syndrome.

The Quack (Nasdaq) was even uglier than the Ps. It probed its highest levels since 2000 with vigor and then imploded. For the day, it was only down less than ½%. It is the nature of the fakeout to new highs and reversal at the March top that is concerning. This has the potential to become a double top. We’ll know it when we see it. Again, it’s not the end of the world. More often than not, market reversals are more of a process than an event. Besides, as trend followers, we’re going to be a little late to the party anyway.

The Rusty (IWM) was the ugliest of all. It stalled short of its prior all-time highs and sold off hard, losing over 1% on the day.

As you would imagine, the internals weren’t pretty.

Some areas in solid uptrends such as the Energies and Semis sold off hard. So far though, this appears to be what could turn into a buying opportunity. The patterns are Trend Knockout (TKO) in nature. Email me if you need the pattern (or stop being so cheap and buy Layman’s already!, I’m half kidding.)

Some of the recently questionable areas such as Aerospace/Defense sold off hard. This action keeps them in the questionable column.

The Transports sold off fairly hard. This action has them forming a minor double top.

Gold and Silver stalled out. So far though, their recent bottom appears to remain intact.

So what do we do? Again, do not make any drastic decisions based on one day’s action. If this is the start of something bigger, you’ll get stopped out of your existing positions and will then be offered some opportunities on the other side of the market. And, if it is not, then your longs will go back to making money. As usual, take things on a setup by setup basis. With technology pulling back, I’m seeing a few setups there. I’m not seeing many new setups in the Energies just yet but I imagine that we will on any additional pullback. Ditto for Gold and Silver.  Regardless of what you do, just make sure you wait for entries. Often, that in and of itself, will keep you out of new trouble when the market fails to follow through.

Best of luck with your trading today!

Dave

P.S. Come to the free webinar tonight because without you there will be no webinar! I’m very excited about the material. I promise to teach more than I pimp!