Market Analysis

Black Candle Magic

Did $NDX just trigger a sizable sell signal?

Following the torrent rally since the Fed introduced QE in October $NDX had settled in a seemingly permanently overbought RSI reading above 70 beginning in mid December.  Indeed all of 2020 the daily RSI has been above 70, a very rare event.

Really striking also has been the consistency of the price channel since the mini December pullback. If algos could paint they may just paint a chart like this:

Like near the end of 2019 price exceeded that channel to upside briefly yesterday and subsequently failed to stay above producing a short term sell signal, that signal has sent $NDX back to the lower side of the channel today.

As of this writing this channel is intact, but the channel is also very much long in the tooth. A break of this channel risks ending this aggressive uptrend.

But that’s the short term speaking. On the longer term chart we can note a confluence of events that suggest the triggering of a larger sell signal.

Here’s the chart, explanations below (click on chart to zoom in):

Firstly note the RSI readings above 70 since the middle of December. Very rare to see such overbought readings extend for such a long period of time. It speaks to the one way nature of price discovery in the past 5 weeks and explains the steep and consistent channel in the earlier chart.

But let’s discuss the signal confluence: Yesterday $NDX printed a black candle, not only a black candle, but a black candle following an extended uptrend, but also as $NDX pierced the upper Bollinger band. As you can see in the chart that confluence of factors has produced sizable sell signals in the past year and a half. We saw it in October 2018, we saw it in April 2019, and again in July 2019 and September 2019.

Each time we saw corrective moves to at least the lower Bollinger bands and 50MA, even moves to the 200MA or even below. As $NDX is so massively extended above its MAs such reconnects should not surprise at some stage.

What is a black candlestick and why could it be bearish? A black or filled candlestick means the closing price for the period was less than the opening price; hence, it can be bearish as it indicates selling pressure.

Note too during the subsequent bounces in Q4 of 2018 the bounces ended twice with black candles. These black candles came in context of counter rallies and not extended uptrends, nevertheless they were quite meaningful at the time.

Will this candlestick be meaningful? We’ll of course see, but one can note some more intra-day downside action today. However we don’t have a new high on a negative divergence yet and note also the July 2019 event ended up with slight new highs first. Also note that following the signal price can maintain proximate range for several days before real downside emerges. So the signal is there, but it remains unconfirmed at this stage, but signals risk of sizable downside corrective risk into the 50MA at minimum, into the 200MA should a more serious correction evolve. If either corrective action does unfold we may have just seen black candle magic on the charts.

When is the signal invalidated? When new highs sustain. Temporary new highs would not be enough especially if they come on a negative RSI divergence. In that case the sell signal would potentially become more powerful. So bulls need sustained new highs to invalidate the signal.

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Categories: Market Analysis

4 replies »

  1. Sven,

    Keep an eye on the current “Grey swan” coronavirus outbreak, as I think we are understimating the potential for a “Black swan” event. The early 2000s Sars event peaked at around 8,000 infected, about 9-10% death rate. Note that although the death rate of the current outbreak is around 4-5%, the infection rate hit the 400 person range in only 3 weeks, versus 8 weeks in the previous early 2000s outbreak. Thus it really comes down to how well we contain the virus inside China, and I think it is positive they are shutting down airports, trains, etc around the epicenter. I only wish we would shut down flights between US and China for a few weeks, to make sure this does not turn into a pandemic. It would be wiser for the fed to print a few hundred billion and hand it directly to the companies affected by a short term travel ban, instead of giving it to hedge funds to leverage the futures via repo at only 1.55%… but I regress.

    For more information on a pandemic analysis via John Hopkins last year, see link below.

    I was shocked to read that a real pandemic could last between 6-18 months, and could kill as many as 65 million due to our global airline system. That said, does not look like this virus is deadly enough at this point, and I really hope it stays that way and does not mutate. So far those with pre-existing conditions, in the 60-80 year old range seem to be most at risk. “WHO” is caught in a struggle between not having enough information yet to understand the severity of this episode, and how not to crash the global economy due to fear contagion. I would guess the fed will step in if the markets crash, yet not sure if even a 1.5% rate reduction would matter if people you know start dying. Negative animal spirits can get extremely irrational. Goverments and agencies need to contain the fear as that solves nothing. The fed is in a pickle having pumped the markets at least 10-20% beyond reasonable, using their ammo before it was necessary. This is not a good starting point for a possible pandemic for the markets, and the currently comparison of 10% gains in 6 months and 19% gains in 12 months for past outbreaks will not compare due to starting point and degree of seriousness of our current situation. Wall Street wants investors to believe this is going to spike the markets in 12 months, not sure that is logical given the facts so far.

    Condolences to anyone affected now or in the future. We as a global society need to prepare better, as we still do not have a vaccine for the early 2000s outbreak. Not sure why, perhaps because it does not fit our maximum profits global capitalism models? I would disagree as a company who could product a vaccine in 3 months instead of 3 years is a true trillion dollar company in value, capable of saving millions of lives possibly and being infinately compensated in the process. An I-Phone will not be worth much to anyone who needs an I-Cure. We tend not to change until forced by harsh consequences via unexpected serious reality shifts. I hope this is not the case for 2020.

    Good luck with all your investments…

  2. Texas AM at College Station, about 109 miles distance from about 2 million Americans in the greater Austin (TX capital) metro area, is currently being tested for coronavirus. The student had just returned from Wuhan, China via a predictable “pandemic flight”. Seems kind of crazy we just funnel as many Wuhan vistors to all the major global cities, because global stock markets might suffer if we take precautions? Wish we could just executive order quarantine all airplanes for a few weeks by labeling them all “Max 737”, as that would be more politically correct as they are objects instead of people. I doubt Texans are going to be more worried about their 409ks than stopping a possible pandemic this weekend. Nasdaq futures are up about a half percent so it seems the fed QE machine is immune to the coronavirus. Not sure the president twittering “All is well” is going to keep everyone calm much longer if it spreads across America quickly. I really hope this all turns out to be short term, and not very deadly. Dallas Texas kept Ebola contained in 2014 (via airplane origins as GDP won again in 2014), so they will be prepared to react quickly in 2020.


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