Last week showed the potential for an important reversal in the stock indexes as prices were rejected early Monday morning after a large gap up due to positive news on a vaccine. It is not unusual to see price top on good news and rally on bad news. So, while it’s entirely possible that’s what happened this past week, the only thing we can do is follow the price action and not speculate as to what may have happened!
Below is a 2-minute chart of last week’s price action in IWM (the small cap stock ETF). This is about as good of an example of seller rejection or excess as you’ll ever see! The volume profile is on the right side of the chart in blue. The most volume for the week transacted at 172.48. We should consider that as the fair value price for IWM last week. Almost no volume transacted between 175 and 178. We should consider that area the least fair value for the week. Only sellers profited from transactions within that zone.
What does that mean for this week and beyond? If sellers continue to dominate that zone then price won’t spend much time there. It could possibly spike back up near (or slightly above) the high and quickly get rejected there again. That would be bearish. It would also be bearish if price was unable to get back above ~175 and then started moving lower. Filling-in value below 170 or taking out last week’s low of 168 would confirm the bearish scenario.
There is a bullish scenario also and I’m currently leaning in that direction. If price ignores that seller excess zone and spends time trading there this week that indicates that the sellers are less aggressive than they were last week. Buyers will see that and likely continue to push prices higher. A consolidation in the 175-178 area would be an indication that price is likely to break higher. Something to watch for!
I’ll be showing some new charts with a different look than the ThinkorSwim charts I’ve always showed in the past. This (subscription) chart package will automatically label the candles with the 1, 2u, 2d, and 3 labels that I’ve introduced you to recently. These labels don’t represent a change in the method that I’ve always used to identify price momentum. I use the previous candle’s range (high/low) and half-back (HB) to determine price momentum and potential future direction. The automatically generated labels simply make it much easier to spot the range breaks on a chart. Price breaking above the previous candle’s high after remaining above the low is labeled as 2u (2 up). Price breaking below the previous candle’s low after remaining below the high is 2d (2 down). A 1 is price remaining inside the previous candle’s range which represents a consolidation. Finally, a 3 represents an outside candle which is a higher high and a lower low than the previous candle. That is an indication that buyers and sellers are becoming more aggressive at either extreme.
Below is the 3-grid chart of QQQ (tech ETF). Daily time-frame is the top chart with the monthly and weekly on the bottom. I’m showing the 3 time-frames because when they all line up in the same direction any signal generated is that much stronger! The monthly candle is a green 3. That means price dropped below last month’s low early in the month and it has now moved above last month’s high. That’s bullish price action. Last week’s candle was 2u which indicates price is in an uptrend. The candle itself was red which is slightly less bullish than a green 2u but still, price is up trending on the weekly. Finally, Friday’s price action on the daily chart led to a 1 being formed. That was an inside day or a consolidation. It best to play the candle after a 1 by going long above the high or short below the low of the 1. However, based on the QQQ monthly and weekly charts, should I really consider going short based on a signal from the daily chart? I could but any daily short is countertrend compared to the weekly/monthly charts. Wouldn’t it make more sense to wait for either a green 3 or a 2u on the daily chart to initiate a long and forget about going short at least until the weekly chart also confirms a bearish signal? Think about it.
One more stock to consider. I’m going to ask you to do the analysis. Below is the daily/weekly/monthly chart of WMT. What do you think?
That’s all for now. If I come across any other charts of interest I’ll add them below and notify you by tweet. Good luck this week!
Questions or comments, let me know on Twitter.