Monday, August 22, 2011

A Day for Closing Short Positions

If you've been short recently, and I certainly hope you've been, today may have been a good day to unwind and take profits. I closed the last of my short positions late in the day when it became apparent that a Graveyard Doji was forming on the S&P 500.

For those new to Japanese Candlestick analysis, a Graveyard Doji is formed on a day where the price opens AND closes at or near the low of the day with a big intraday move higher. In a downtrend this is deemed a possible bullish reversal. It does require a confirmation the next day and in and of itself is not always worthy of using as the basis of a trade.

However, there were other factors that led me to close out all my shorts. Pull up a daily chart of the S&P and you can see a potential higher low might be carving itself out on the MACD Histogram while the S&P might be heading to a lower low. Such a Histogram divergence will often presage a major reversal and would be very bullish in the near term. These are good signals for profitable shorts to be prudent and lock in profits before the "pucker factor" gets too high.

My thesis is the market will make a lower low in the next two weeks (with divergences as we are highly, highly oversold) to complete this leg down with a subsequent rally to retest the neckline of the Head and Shoulders pattern. After that rally is complete we should return to the primary downtrend.

Although I believe a short-term reversal to be imminent, there's no way on God's green Earth I'm going long until I see a LOT more confirmation. And even then, it would be a small, tight trade since it would be against the primary trend. Trade safely always. Talk to you all again soon!


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