Keep Your Shirt on or You'll Lose it (for 08-10-11)

                Yet another crazy day of trade in the markets today.  Yesterday I said that I didn’t believe that we needed to wait for confirmation, apparently we did.  We are still showing a potential reversal with the pattern that emerged today. 

The really cool thing about candlestick charts is that they have an additive property.  Basically, if you can’t see a clear pattern in a single day candle you can take the previous two, or three, and combine them to form a clearer signal. 

Don’t forget to mind your indicators.  All three indicators that I use are still saying bear.  What we need to see in order to begin a short term reversal is to get a closing price above the high of the combined pattern (called a doji) which is still at the highs from the past two days (1170ish).  We may see this tomorrow, or we may see another hammer or slight uptick to close the huge distance between wherever we open and the highs of the past two days.  Or, we may continue down.  I’m sorry that I can’t tell you more specifically.  I will update you as soon as I know for sure.

When Fear Takes Over

     When a market undergoes distribution and moves into stage 4 (decline), fear has a tendency to take over.  When fear takes hold of a market fundamentals (balance sheets, eps, sales growth, etc.) begin to give faulty signals or make you think that overall direction has not changed.  When fundamentals break down, in order to place winning trades you have to look to technical indicators and patterns. 
     Technical analysis is all about market psychology.  Most technical "levels" and indicators reflect what people think about the chart they are looking at.  For example, you can look at any candlestick pattern and there is a psychological reason why it forms.  Look at the so called "hammer" formation:

"after a sell-off is abated and the market returns to, or near, its high for the day.  The failure of the market to continue the selling reduces the bearish sentiment, and most traders will be uneasy with any bearish positions they might have."  -CANDLESTICK CHARTING EXPLAINED- Gregory L. Morris.