by Pinchas Cohen
Yesterday, the S&P 500 fell 0.47 percent – led by the 0.99 percent slide in Industrials – the worst decline since the 0.77 percent decline of September 5. The best performing sector of the day was healthcare (NYSE:XLV) with only a 0.14 percent decline.
Last Wednesday we forecasted that healthcare would rise. In the next four sessions it rose almost 1.4 percent, more than double the 0.6 percent the benchmark index advanced during the same time.
Since then, it fell with the broader market, but as mentioned, yesterday’s decline for the sector was the smallest, making healthcare the strongest sector of the day.
We believe healthcare will jump again and a lot higher.
More important than last week’s gain was a resumption – and therefore reaffirmation – of the uptrend which pre-existed the interruption of the triangle continuation pattern. Moreover, the triangle retained integrity, mostly supporting the price on the ensuing decline.
On Tuesday, it was a pleasure to observe the market dynamics in play. The price dipped into the triangle but ultimately was shoved right back up and out of the pattern, closing right on top of the top line of the triangle. Yesterday wasn't exactly a textbook case of supply-demand. The price gapped down, along with its benchmark. Its low was higher than yesterday’s low, suggesting demand was still there and growing. The price was even pushed up again and out of the pattern, but ultimately closed a mere 3 cents lower than its open. So, the close was inside the pattern. Does it mean the pattern failed?
This is an example that demonstrates the advantage of experience over textbook education. On one hand, the price wasn’t supported by the top of the pattern, but on the other hand we’ve seen evidence of buying already above the low of the previous day. This conflict may be expressed by the candle formed by yesterday’s trading dynamic: a high-wave candle. Perhaps the best way to describe the psychology of the candle is, to quote William Shakespeare, “…full of sound and fury, signifying nothing.”
The price went up and down and all around, but closed at the same price as where it opened. It indicates more than just confusion for investors – it expresses fear and a lack of leadership.
This candle occurs mostly at key levels, in which different investors have different outlooks for the asset and are willing to put their money where their mouths are. The candle also normally signals the end of a move. Since it was a third day of declines and a mere .10 percent from the pattern top, and the best performing sector to boot, the weight of the evidence suggests to us that the pattern remains intact.
Unless further bearish news hits the market, we expect the price to jump, retest the Tuesday $84.30 high and reach the minimum target of $85. This could happen as early as within the next couple of weeks.
Trading Strategies
Conservative traders may want to wait for a close to clear the pattern, before entering a long position.
Moderate traders may enter either with a close above the pattern or a dip to the low of the previous two days.
Aggressive traders may go long now, with a stop-loss beneath Tuesday’s $82.63 low.