Securities Research Services

Friday, February 15, 2008

Bearish Engulfing Candlesticks Abound

Yesterday the market, represented by the SPY chart below, sold off at resistance creating a lower high and a bearish engulfing sell signal.

This sell signal was repeated en masse on stocks across virtually all market sectors.

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Explanation:

Near term sentiment isn't bullish enough to provide support and with yesterday's sell signals the market may be headed for a retest of January lows again. While we continue to look for a run back up to test the 50-week average, we can't ignore the weakness that exists on the daily chart view. A sell signal is a sell signal so it makes sense to take a short position here as long as good tight stops are used should this just be another market misdirection. Risk remains high, so keep your exposure to a minimum.

Outlook:

The rebound rally back up to the 40- and 50-week averages we have been discussing will likely occur sooner rather than later. Until prices regress back to their mean, risk of whip saw will remain high and position sizes should be kept small.

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