The market continues to send mixed signals. There is no way to know if this pullback is worth buying or if we will see continued selling pressure. I am starting to see lots of potentially bullish hammers. The key point to remember with ‘Hammers’ though, a candlestick with a long tail and preferably a small white body, is that the value of their bullish predictive power depends on the duration of the downtrend before the hammer finally prints on the charts. Put another way, don’t blindly buy hammers. There needs to be decent signs of seller exhaustion. The longer the preceding down move the better. The best predictive value is reached when volume confirms the hammer candlestick pattern. Huge volume while the hammer builds confirms selling exhaustion.
As I said the market is sending mixed signals though. The FBT – First Trust Amex Biotechnology ETF has put in what looks like a potential ‘Island Reversal’. In any case the highlighted pattern in the chart represents overhead resistance. Biotech stocks have been the leaders and the Biotech Index was trading at an all time high. If we have indeed witnessed a top this will put additional pressure on the indices. This is just another red flag telling us the indices are encountering some serious selling pressure at this point. We have potential bullish reversals within other sectors though. Time will tell how this all plays out. For now, I expect the markets to trade sideways and try to rebuild pressure.
Up-to-date FBT – Biotech ETF chart on my public list.
An island reversal is characterized by a consolidation pattern at the end of a trend with a gap leading into the pattern and a gap leading out of the pattern like shown in the chart above.
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Have a great evening!