As we get set for a new market day, BMR’s technical analyst takes a detailed look at the CDNX chart after Monday’s reversal and yesterday’s 43 point plunge. John’s comments are much in line with my article yesterday which emphasized that this pullback is something to embrace, that the likely worst-case scenario is a 4% further drop from current levels:
John: The CDNX received a jolt yesterday, falling over 43 points and “landing” at 1622.
This was not an easy day to take in strike but it is so much easier to deal with your market emotions if you learn to read charts and become familiar with some basic technical analysis. So with this chart I will outline the current situation and what we can likely expect in the near future.
Looking at the chart, we can see we were forewarned of weakness by the divergence between the Index level and the RSI. This is denoted by the horizontal blue line on the Index level and the downsloping blue line on the RSI.
On the chart I have put two orange circles around the two recent highs at the same level. Together this forms in TA language a “Double Top”, a reversal pattern, which signifies the CDNX has run out of steam – for the time being at least. We see that from the first high, it retraced to the Fibonacci 38.2% level and then tried to go higher again but failed.
The horizontal green lines show levels of support so we can expect the support band between approximately 1550 and 1600 to hopefully prevent the Index level falling further.
Jon has already mentioned that the 50-day SMA and 100-day SMA are also providing support – these are shown on the chart as blue and red lines respectively.
The bottom two Fibonacci levels coincide with the support levels which gives these support levels a lot of credibility.
The ADX trend indicator shows the ADX (black line) going down, showing a weakening uptrend, and we also see that the -DI (red line) has crossed up over the +DI (green line) indicating that the weak trend has changed from bullish to bearish but this could easily develop into a consolidation phase.
Now, what precisely is going to happen I cannot tell you but I can give you an idea what to look for.
First, I feel we have enough strong support available to stem this tide. When the decline ends I would not be surprised to see a “hammer” candle just like the ones shown in the four green circles. As you can see, “hammers” occur quite frequently when the direction reverses. Look out for it.
After the decline has stopped I expect to see some consolidation to create a solid base, similar to what occured in December of last year and last month before another run-up and don’t forget we are heading for the summer doldrums.
You may not like days like yesterday but to be successful in investing/trading you must not panic and you won’t if you understand what’s going on.
Here’s a little extra note: You see the two black circles on the chart. Well, the top one shows an example of an “exhaustion gap” which occurs at the end of a run-up when there is a frenzy of buying but the sellers gradually drive down the buyers, forming a black candle (opens high and closes lower). The black circle below shows when “exhaustion gaps” occur there is heavy volume.
Outlook: We may see the Index fall a little further but the chart shows there is a lot of credible support nearby.