Weekly Update for June 28 - A Cautious Bear

Since the weekly TD Sell Setup was perfected on June 5 the market has been undergoing a pullback/consolidation. A technical “sell” signal was given on June 19: Although the RSI (top pane) has confirmed the new price high by making a new high itself, the Composite Index (second from the top) did not confirm. Since the RSI then turned down this is a *confirmed* bearish divergence between the two indicators.

So far we have seen a bearish price flip and a move down to the short moving average over a three week time period. A typical pullback/consolidation runs 1 to 4 price bars after a perfected signal. The question now is whether the rally that began in March will resume. Or will we have a deeper/longer correction due to the added technical sell signal? I favor the latter scenario but note that this week’s price bar is a Doji candlestick where the opening and closing prices are essentially the same. A Doji is a reversal candlestick. In particular, the Doji formed on our price chart is classified as a “dragonfly”.

The following discussion is from the excellent candlestick section of stockcharts.com:

“Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. … Bearish … confirmation is required for both situations.”

One confirming factor to consider is volume. The Dragonfly is a better indicator of a bottom if volume increases; and it did last week – we had the highest volume since May 15 (bottom pane).

So where does this leave us? In my opinion we will only get confirmation that the uptrend has resumed if we can qualify and confirm a break of the current TD Supply line (downward sloping dashed red line on the price chart). For next week the line sits at 951.26.

The buzzing of this week’s Dragonfly has made me a more cautious bear and has caused me to look up. But unless we get confirmation by confirming a break of the supply line I will go back to eating my salmon.