Tuesday, July 20, 2010

Bullish Engulfing Pattern

With the disappointing IBM and Texas Instrument earnings announcements last night, the S&P 500 opened sharply lower this morning. It seems that the market is now very concerned with companies that miss revenue targets and we could be setting a theme for this quarter’s earnings. However, as we returned to the office after a gorge fest at the local Chinese restaurant, the S&P 500 had completely erased all losses and rallied throughout the remainder of the session. Why? I don’t know, maybe rumors on the Fed stopping interest payments on excess reserves or leaks of Apple’s great earnings. Whatever the reason the market action today created a nice bullish trading pattern called the engulfing pattern (which in no way relates to our lunch habits).

The Bullish Engulfing Pattern is basically a period of market movement (one day in this case) that opens below the previous market movement (yesterday) low, and closes above the previous market movement high. And although technically speaking yesterday should have been a down day this still seems to be a good signal for the bulls especially after the sharp sell-off on Friday. The chart below shows the S&P 500 over the last three months. At the very far right of the chart you can see the last green line has completely covered the green line to its left. Or it seems to ‘engulf’ Monday’s price movement. This signals that the bulls have taken control of the price action and might be the end of the short-term decline.

Also, note that the blue line on the chart is the 50 Day Moving Average. That seems to be the next resistance zone as prices could not move above that moving average in early May, mid-June and last week. It also coincides with the downtrend line Carl mentioned last week. These longer term trends are where we focus our attention but the day to day activity in the market is interesting to note because the market may be giving us hints.