Dramatic candles and dramatic price action – but NOT the big short!

In terms of dramatic candles and dramatic price action over the last few weeks we have been spoilt for choice, and equity markets in particular have certainly delivered in spades, with the usual crop of doom mongers emerging from the undergrowth to call the top of the current bull market, and the start of the big short.

For regular readers, you will no doubt be well aware of my views, and until we see a selling climax of some note, then the current bullish trend is set to continue, with the recent volatile price action nothing more than a correction to the longer term trend.

And so to those volatile candles starting with the daily VIX which delivered a dramatic example on the 24th August, with the index spiking from the low of 28.03 to a high of 53.29, before closing the session at the mid-point of 36.02 and ending with a deeply extended wick to the top of the candle. This duly triggered the volatility indicator once again, which was no great surprise and on this occasion signalling a trap move by the insiders with the consequent price action moving firmly inside the spread of the candle, before moving consistently lower throughout September and into October, and confirming that the longer term bullish trend for equities remains firmly in place. The next key level for the index is in the 14.50 region where we have a potential platform of support on the accumulation and distribution indicator, (as detailed with the red dotted line) with a further level below in the 12.00 region, with the first of these likely to be tested in the next few days as bullish momentum in equities continues to build.

The weekly chart is perhaps even more extreme, but which once again confirms the bearish picture for the VIX and the bullish sentiment for equities, with last week’s candle testing resistance in the 28 area, and duly failing to hold and closing with a deep wick to the top of the candle. The platform of support in the 18 area is likely to be stubborn and needs to be breached, before we can expect a move opening towards the next level at 12.

Moving to the indices themselves, all the major US markets exhibited similar price action on the daily timeframes, but the YM on Friday delivered the strongest signal yet of insider buying, with the NFP release providing the perfect opportunity for the market makers to create a shake out of epic proportion, as sellers panicked and duly delivered the required stock into the strong hands of the market makers. Monday’s follow through simply confirmed Friday’s price action, with a strong move away from the volume point of control on the daily chart (as denoted with the yellow dotted line).

This positive sentiment has continued in today’s trading with the index climbing higher to trade at 16,737 at the time of writing. Ahead on the VPOC indicator we have a low volume node at 16,900 which should see the market move quickly through here and on to test the resistance area as shown with the blue dotted line on the accumulation and distribution indicator in the 17,250 region. In the short term, the key now on the daily chart is a close above the high of the candle of the 17 September at 16,837, and once this has been achieved, we will then have a solid platform in place, and a springboard for a sustained move higher in the longer term. And of course, waiting around the corner is our favourite friend…… the Santa Claus rally – I thought I would be the first person to mention it before anyone else jumps on that particular bandwagon!

By Anna Coulling

Indicators from Quantum Trading and charts from NinjaTrader