“Drop and Pop” today on very high volume. The Emini closed down 4.25 points at 1,371.75 on Tuesday. Déjà vu? It felt like Friday 6 October all over again with a long legged Doji candlestick pattern on high volume. Do you know which way to trade the Emini market now?
Doji déjà vu
The Emini gapped down at the open, 4 points below yesterday’s close. It then continued to fall to 1,364 then bounced strongly on high volume to eventually close near the high at 1,371.75. Once again the open and close were within 0.25 points of each other – a classic long legged Doji candlestick pattern. The volume was 1.3 million Emini contracts today, close to the highest values we’ve experienced in the last couple of weeks, as you can see from the chart above.
There was also inter-market divergence today with the NASDAQ failing to close it’s gap down. Whereas the Dow showed a much more bullish pattern and closed above yesterday’s low. This adds to the divergence argument that I mentioned yesterday, where the Dow is acting stronger than the NASDAQ – all bearish signs in the longer term.
A simple Emini pattern
I’ve talked about Doji candlestick patterns on the Emini a couple of times before. Briefly, Doji is the name of a Japanese candlestick charting pattern that occurs when the open and close of the bar of virtually identical. When the open and close are either at the top or the bottom of the range, the pattern is called a long legged Doji. In today’s case the close was near the top and this pattern is bullish, particularly on large volume.
Last time around, on Friday 6 October, I showed a very simple system to exploit this pattern. The open and close need to be in the top quarter of the range and today’s low needs to be below yesterday’s low. That’s it! There are only 83 trades in the S&P over the last 20 years and the stop is rather large, however, the profit factor is 4.8 and average winning trade about 5 points. This analysis shows the potential of going long, even at this late stage in the rally.
Trade when everything comes together
As I mentioned a couple of days ago, not many of my exhaustion indicators are showing that the market has finished its rally. However, a couple of my trend oscillators have turned down. My preference is to only trade when both my trend and exhaustion indicators are pointing in the same direction. Besides, my trading partner Rob always tells me I enter too early. But I’m sure we won’t have to wait long – there’s always plenty going on in the Emini market.
Do a Google search for Doji or long legged Doji candlestick pattern to get more information.