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Stock Market Doji Reversal Pattern

Stock-Markets / Technical Analysis Sep 18, 2009 - 01:53 AM GMT

By: Jack_Steiman


Normally when you get a doji after a trend has been in place, you see a reversal of that trend for a few days. A doji meaning you open and close at basically the same level which indicates that the bears in this case have caught up to the bulls short term. The question now becomes, will it matter? It has worked at times in this bull run and hasn't worked at times, although doji's off a strong trend in place usually do work. Add in how overbought we are on those daily charts and you have a decent chance of seeing at least some type of selling over the next couple of days.

Don't expect the world if you're a bear. You've proven and done absolutely nothing for six straight months now. The onus is always on the bears from here on in to get the market to sell. They have basically taken their glove and gone home. Given up. So will they even try to get a drop of selling or will they feel it just doesn't matter? Hard to say but one thing for sure is you have to respect the candlestick printed today. A doji, and thus a little watching isn't a bad thing. We went to cash for that very reason. Severely overbought with RSI's in the lower 70's and the stochastics in the upper 90's. That combination alone, without a doji, would normally give us a pullback. Not this market though. The last time I can remember markets staying this overbought this long was in the heavy froth days of 1999. Overbought basically stayed that way for roughly a year. Bottom line is we have the type of stick printed today that suggests, at least suggests, a small to moderate pullback is upon us. Don't count on it and certainly shorting makes little to no sense. You know that drill. Never short a buy signal confirmed such as we have now.

The reason this market is having such a hard time selling is because the dollar continues to erode. Now if you want some possible good news on the dollar, or the PowerShares DB U.S. Dollar Index (UUP), you can look at how amazingly oversold its daily chart is. Stochastics right near zero (0), the lowest reading possible and RSI's in the 20's. Anything below 30 is very oversold. That combination would suggest the dollar bounces, a technical bounce only, and that would also support a small pullback in the market. The dollar has remained oversold but this is amazingly so. Because the market has its head down, it doesn't mean we'll get that bounce in the dollar or the move down in the market, but it's set up to rally some so let's watch what takes place there. It seems only when the dollar rises does the market fall. The correlation recently has been dead on reliable.

The commodity stocks remain overall possessed. Very hard to get them to sell as most of them have broken out above trend lines through their bases. High volume gaps did the job and when you have multiple gaps as many of them do, the bears aren't that interested in attacking those plays keeping strong bids underneath them. The weak dollar and the technical set-ups remain the reason these stocks seem to have no top these days, no matter how incredibly overbought they are and how incredibly straight up they are. It makes me nervous looking at them, thinking about playing them but that has been a formula that has worked over and over. Until the dollar can take out its lost 50-day moving averages, the commodity world will remain a buy all selling situation, that's if they ever do sell at all.

We have not taken out the top of the S&P 500 gap at 1080, and thus the bears have a glimmer of hope that we can fall back below the bottom of the gap at 1060. It is astounding how little fight, should I say no fight at all, the bears have put up at this level. When gap downs such as 1060 take place on huge volume and on a 2% gap down to boot, the odds of just getting into that gap on the first try are about zero. Except now. There's always exceptions, but the bulls will ultimately need to take out 1080 for the next leg up to accelerate. That would take the market over 1100 with the long term trend line at 1150, which is also where the 50% retrace of the entire bear market sits. I know 1150 seemed impossible just a few weeks back but we now have to seriously consider it, especially so if we take out 1080 on a closing basis.

The 1018 gap is where the bears can claim the bull run is likely over. I don't see that happening any time soon. Between here and 1018, buy all weakness folks. We took profits today on our three remaining positions --including Ak Steel Holding (AKS) +3.45% in 3 days -- but if things unwind, even a little bit, it'll be time to get stocks that are in good bases. In this market, when the 60's unwind, that has been enough to enter the right plays. We'll continue to search for the right plays for all of you.

Jack Steiman

Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2009

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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