The Chart That Cried Wolf - Wait For Confirmation
Remember, none of these indicators predicts the future! They only help you to see when probability is likely to be on your side, and your trading skill and money management do the rest. A stochastics reading of 90 means nothing if a stock has just broken out of a range.
That’s me, from 2005, and repeated in the sticky page up in the navigation bar I called Dummy Wisdom.
See, I know the rules. We all do, except for the neophytes. That’s not the problem. The problem is in the execution. Remembering to follow those rules. And I still fall off the wagon every time I turn around.
The S&P had the big selloff, then bottomed, then rose on decreasing volume. Then it started throwing off topping candles. This chart is the best example I’ve ever seen of why we need to wait for confirmation of what appears to be a bearish topping formation:
The dojis and hanging men have cried “Wolf!” over and over, only to be cancelled by another up-thrust. And the whole time everyone and their brother has oscillators showing overbought.
Anecdotally at least, it seems to me that the only times I remember everything getting pegged against the redline for this long (where so many shorts and longs get stopped from the excessive extension) are when we’ve been at the first thrust of a major trend, usually in the opposite direction of the preceeding one. I plan to do some “real” research on this in the near future and see if it holds water, or if it’s just wishful thinking brought on by the nostalgia hidden behind the cobwebs in the attic of my mind.
I’m off to Six Flags with my girlz. Ya’ll have a good weekend.
Born2Code said,
April 29, 2007 @ 11:40 am
i am no candle expert, but these are indecision candles and not topping candles. indecision, by definition, can be resolved up, down or sideways.
Will said,
April 30, 2007 @ 6:54 am
B2C - agreed, but depending on the context, the emergence of indecision is commonly the first sign of a reversal after a trend of any length. A gap-up doji or a Hanging Man in an overbought uptrend is often signaling that the buying is exhausted, and so they’re a heads-up to be prepared to trade any (bearish) confirmation. The same candles in a trend that’s not “overbought”, and especially if they don’t gap away from the previous day, are exactly as you say, a guaranteed sign that the market will go up… or down… or neither.
For swing trading, a simple strategy like screening for stocks that are overbought on the RSI, then looking for individual reversal candles, has been a pretty solid play. However, every now and then it turns completely useless (like now), and makes me curious as to what’s happening in the bigger picture. My own personal guess, and that’s all it is, is that the hundreds of billions of excess dollars sloshing around take years to sop up, and thus the Big Cycle operates on a different time scale than me. I find myself rather myopic sometimes.
I think the longer trend after last November (the continued thrust thru February 22), and the shorter one from Mid-March till now are both out of the ordinary in the way they kept going… and going, with no pause to take a breath. Reminds me of the good old days back around ‘98, when overbought only became more overbought.
To me, this is all just a challenge to remember to stay with the trend “until it ain’t”, something I still have trouble with.
Thanks for the visit!
Born2Code said,
April 30, 2007 @ 1:27 pm
i remember mark hanes on cnbc proclaiming in astonishment that we just had 58 consecutive up days on the nasdaq… we all know how that ended… Maoxian is talking about manicurists getting rich in China with the market going up like crazy over there.
i know exactly what u are talking about… however after reading ken fischer’s latest book i am not about to bail on this market till a downtrend is established… i will get a hurt a bit in the first part of the downtrend but i will live with that…
on another point, i do not short RSI for swing trading. i rather short down trending stocks on up days as they kiss off resistance and turn back down.