11/2/2006 9:33:57 AM
A rare Japanese candlestick pattern was put in on Wednesday's close. Tracing back to last Wednesday through Friday, we showed an imperfect Evening Star pattern that was ominous, warning the uptrend was at an end. This Monday through Wednesday the pattern repeated but this was an even more powerful form of Evening Star, because of the doji star pattern on Tuesday. Tuesday's doji star was significant enough to suggest taking profits on long positions, or to put on a short position. That was confirmed yesterday.
We can not emphasize enough, the ominous nature of the double evening star, with an exclamation point on the doji star seen on Tuesday. In addition to that, Wednesday's candle was a bearish engulfing.
We don't think that the QQQQs will necessarily go straight down from here, but we would not want to be long going into the weekend. Black Monday occurred in 1987. We remember the market losing a quarter of its value in a single day. We are not suggesting that will happen this Monday, but rather, that caution is advised. It is also important to remember that, in 1987, the market recovered from Black Monday in months, so if you were patient, you didn't necessarily have to take a loss.
Several important things happened yesterday. The string of negative economic reports has finally painted enough of a negative environment that investors and traders are paying some attention. Construction spending came in below consensus at -0.3%. This anchors what we have been suggesting, that the collapsing housing market will have more effect than investors are calculating.
ISM came in below consensus as well at 51.2. This followed a poor Chicago manufacturing number, which followed a poor Philadelphia manufacturing number, it seems there is a definite slowing in the economy. Below 50 signals a contraction so there isn't much room left before that occurs.
The Canadian Government announced it wants to increase tax revenues by taxing Canadian Trusts, which gave all Canadian Trusts, and companies considering this structure a significant haircut. There were across the board losses of more than 10% for almost all Canadian Trusts traded on American exchanges.
The QQQQs touched the uptrend line that has acted as support since mid-August but managed to close above it. We suspect that there may be a rally of sorts today for the QQQQs, but the S&P-500 and DJIA will continue to move down toward their uptrend support lines. The SPYders broke below their 20-day moving average, while the DIAmonds touched and closed above their 20-day moving average. Both of these ETFs showed evening stars last Friday, so all major indexes are showing very bearish signs.
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Regards and Good Trading,