Download "island reversal" pattern -- september is usually a weak month

Tue, Sep 6 2011 9:02 AM ET
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NEW LOW IN GERMAN DAX AND 10YEAR TREASURY YIELD POINT TO BAD
MARKET DAY AHEAD -- US FUTURES
EXPECTED TO OPEN SHARPLY LOWER -NASDAQ FAILS TEST OF MAJOR
RESISTANCE AT 2600 AND FORMS
BEARISH "ISLAND REVERSAL" PATTERN
-- SEPTEMBER IS USUALLY A WEAK
MONTH
By John Murphy
DAX AND BOND YIELDS HIT NEW LOWS... European stocks fell sharply on
Monday (while U.S. markets were closed) and are weak again today. Chart 1
shows the German DAX Composite, which is largest market in Europe,
falling to another 52-week low. Given its strong correlation to the U.S. market
(line below chart), the new DAX low should weight heavily on U.S. shares
today. Another bad sign comes from today's drop in the 10-Year T-Note Yield
(TNX) to a sixty-year low this morning (Chart 2). The TNX also has a strong
positive correatlion to the S&P 500. The green line in both charts is the S&P
500. Notice that neither the DAX nor the TNX confirmed the recent bounce in
the SPX. That intermarket "negative divergence" calls for more selling in U.S.
equities. Dow Jones futures are trading 200 points lower. It looks like a rough
start for U.S. equities.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
U.S. RALLY IS OVER... Chart 3 shows the S&P 500 falling 2.5% on Friday to
fall back below its mid-August peak at 1208. It certainly looks like the August
rally has ended and a retest of August lows in store. Chart 4 shows the
Nasdaq Composite last week failing a test of important overhead resistance
at 2600 which represented the broken support levels formed in March and
June (green arrows). Broken support levels (green line) usually turn into
overhead resistance (red line and arrow) on subsequent rally attempts.
Friday's gap down in the Nasdaq also left an "island reversal" to the downside
which is a negative price pattern. [An island reversal takes place when an up
gap is followed shortly by a down gap]. The hoursly bars in Chart 5 show the
"island reversal" pattern more closely. The Nasdaq and S&P 500 are also
expected to open sharply lower today which would pretty much confirm that
the August bounce has run its course. Be aware that September is usually a
weak month.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5