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June 15, 2005

Punch Bowl

A look at the intra-day graphs of the Nasdaq Composite and many of its components today looks very much like a series of punch bowls… Steady sell-off in the morning, followed by a basin and then a steady rally in the afternoon, going out on the highs. Indeed, the candlestick traders must love days like this. Across the board, we have long wicks dipping to new lows, but with very small bodies at the high end of the range (a “hammer” of "doji" in candlestick terminology). Such formations, the candlestickers profess, indicate a failed sell-off and tend to signal inflection points in price movements.

Depending on the opening tomorrow, I may take profits in a couple of my shorts and wait for clearer signals that my bearishness is justified. As with all forms of technical analysis, it is important to take signals in context. I like to see a fundamental reason to justify a signal, and right now I don’t see one. It’s entirely possible that today’s action is simply volatility associated with the triple-witching Friday approaching us. In this case, the hammer signal could prove to be false. The next few days will be interesting as people place their bets according to their convictions. We shall see soon whether the punch bowl is spiked and the bull party will resume.

Disclosure: None


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