John: Today was an anomaly when the global selloff in stocks turned panicky in the afternoon with the Dow plunging below 10,000 before recovering some lost ground in the final 90 minutes. At its worst, the Dow was down 998.50 points, which would have been its biggest loss in history. Every North American and European market ended up in the red. Luckily this does not occur often but when it does, sector relationships seem to go out the window – for example, the U.S. Dollar takes off and so does the price of Gold.
To examine the causes for these changes is a complex undertaking and certainly beyond the ability of the average investor/trader. But after the event, investors are far more concerned about the effects rather than the causes. We want to know where we stand and what to look for in the near future. For that we can turn to technical analysis.
Let’s look at the chart of the CDNX:
On the chart I have put two blue circles around the two recent highs at the same level. Together, in TA language, this forms a “Double Top”, a reversal pattern which signifies the CDNX has run out of steam.
This was followed on Tuesday by a “red candle” which stopped at the top resistance level (green line).
Wednesday’s trading formed a “high wave candle” – it has a small body and long shadows above and below the candle body.
A high wave candle portrays a situation where there is an active tug of war between the bulls and the bears, a volatile condition. The candle shows a market that has lost a clear sense of direction. When it occurs on high volume it indicates the market’s general confusion about the direction prices are headed. This fall in the Index was halted at the second level of resistance (green line).
Today’s candle (red) was also stopped at a significant resistance level as shown by the bottom green line.
There is a lot of bearishness in these daily moves but as you can see they respect the resistance levels to at least pause. I have drawn four other significant resistance levels (dotted green lines).
Well, what should we expect moving forward?
The RSI indicator has plunged to the 16% level, well into the oversold region and still heading down. This indicates continuing weakness in the immediate future.
The Full Stochastics has both the %K and the %D lines falling with no sign of reversing – again, this is anticipating continuing weakness in the immediate future.
The ADX trend indicator has the ADX trend strength line starting to reverse upwards (strengthening) but the -DI (red line) is above the +DI (green line), indicating the downtrend is getting stronger.
Outlook: Tomorrow will at least start to trend lower. Keep an eye on the Index level and the resistance lines for that is where the reversal will probably occur in the form of a “hammer”. When this will occur, it’s impossible to say.
One thing to remember here, the CDNX (and its components) is not the cause. It is reacting to outside forces.