Technical Analysis 20th November 2018

Two weeks ago I quoted some text from one of my books on Dow theory written by Robert Rea, I have attached it at the bottom of this note. The quote is from William Hamilton the editor of the wall street journal.
One of the interesting dilemma’s in Technical Analysis and trading, is the danger of holding an unbending “view”. Often market notes are written from a biased point of view. The writer may hold an underlying position, or in market speak, the author is simply talking his or her book. The book, being the author’s account holdings.
One of the more profound human biases is “confirmation”, meaning that when a lot of information has been rounded up to form a point of view, as events unfold it just can’t be wrong! Really!!? And if it is proven wrong, then the blame is pointed at some other extenuating factor that came into the picture. Really again!!?
One of the better book reads I completed in 2018 was, “Extreme ownership” by Jocko Willink and Leif Babin. The book describes the process of taking ownership of your environment, and everything that goes right and everything that goes wrong in that environment.
Market analysts and traders could learn from the principles described in this book about US Navy seals training, planning the mission and just as importantly planning the escape if it goes pear shaped. Sounds like a trade doesn’t it?
Extreme ownership is not about being “right or wrong”, it’s about management.
Trading plans don’t have a “view” they have two scenario’s written in as the entry point and the exit point, for both trades, winners and losers.

This week saw the S&P Daily stage a reversal back down from 2816 point resistance level. Last Thursday’s and Fridays trading action show a bullish piercing at the very significant 2700 point level. The chart pattern now is shaping up as an inverse Head and Shoulder pattern following on from the Relative Strength divergence, this is a very strong signal of a change in momentum. On this daily chart a retest of the 2816 point neckline seems the next logical step.


Thursday’s low of 2670 is the significant reversal point to monitor, a market move below this level would be very bearish in the following days.

The Weekly Nasdaq now shows resistance at 7260 with historical support shown at 6300 points.
The pennant can break either way, but taking into account the Outside period at the high and the RSI moving lower, the retest of 6300 is a higher probability.
This current “corrective” move does not change the primary UP trend.

When looking at the Australian Weekly chart of the XJO the picture is one of price weakness, this weeks “outside period down” is not a bullish sign, with a potential retest of the long term trend line at 5600 possible. A further Weekly close below 5727 points, will be a telling sign for continued weakness. The market closed at 5730 on Friday.

The Daily chart of the XJO Index is indicating a low in place with the long legged Doji on Thursday. A further price movement below the low of this bar at 5686 points would signal further declines in the Index. The Relative strength is moving along below the key “50” level, any further gains in the Index would see the RSI move the important 50 level.


But we all know the “Index” is not the overall market. Our Australian “XJO Index” is heavily weighted by the 4 banks Wesfarmers, CSL and BHP, leaving a further 190 stocks to be investigated.

ANZ,  three weeks ago displayed a very good divergence signal in the RSI, the following price rally met the Ex dividend on Monday 7th.  The following retracement and Friday’s bullish Hammer is an encouraging bullish signal.



Robert Rhea – The Dow theory.

Several things worth remembering are contained in the following excerpt from a Wall street Journal editorial written by William Hamilton 1921…On Dows theory…..”secondary rallies in a bear market are sudden and rapid, conspicuously so in the recovery after an actual panic break. The test is not at the bottom but in what the market does after a rally…”  “ there is always heavy buying  in support , to protect weak accounts to large to be liquidated”……

Charles Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy and that by analysing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and the likely direction of individual stocks.
From my observation of historical movements this statement has held true for 100 years.
Gary Burton CFTe

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