January 30, 2008 – Following the Federal Reserve Open Market Committee’s decision today to lower the Federal Funds interest rate by one-half of one per cent, the Dow Industrials promptly raced higher by about 200 points. The euphoria lasted about thirty minutes before the trend reversed downward. By the close of trading, the Industrials closed lower by “only” 37.47 points on the day.

That word “only” is very misleading, because price action today left in its wake a long series of bearish Candlestick patterns, in a grouping of ten charts extending from the Daily chart right down through the ten-minute chart. The repetitive and insistent nature of the downtrend is alarming. The following examples reflect the action in the Dow Industrials. The S&P 500 charts are very nearly lockstep duplicates of the Dow charts, and the NASDAQ charts are roughly equivalent. Consider this array of bearish warnings in Candlestick patterns as depicted on sequential charts of the Dow Industrials:

Daily chart: Shooting Star.
360-minute: Bearish Engulfing.
240-minute: Shooting Star.
180-minute: Bearish Engulfing.
120-minute: Bearish Engulfing.
90-minute: Bearish Engulfing.
60-minute: The final bar is very nearly a Bearish Engulfing; the final three bars, together, are an Evening Star, of which the middle bar is a High-Wave Doji. (Therefore, these three patterns constitute a triple warning).
30-minute: The next-to-final bar is a Bearish Engulfing, followed by a long black
Candle. The final four bars, together, are a variation on an Evening Star.
15-minute: The fourth-from-final bar is a very good Shooting Star. It, together with the white bar preceding it and the black bar following it, are an Evening Star, followed by two long black bars.
10-minute: The sixth-from-final bar is a Shooting Star. It, together with the
white bar preceding it and the black bar following it, are an Evening Star,
followed by a succession of black bars, two of which are long.
5-minute: A Shooting Star at the peak (being the eleventh bar from the end of the series); it, together with the white bar preceding it and the black bar following it, are an Evening Star, followed by a succession of black bars, with two brief white-bar interruptions. The final 5-minute bar is a perfect Hammer, which is a warning of a bullish reversal. The 3-minute chart and the 1-minute chart confirm that the Hammer will likely continue to drive a partial upward retracement of today’s price action.

Beginning with the Daily chart and ending with the 10-minute chart, price action produced an extremely bearish scenario. The Shooting Star in the Daily chart, all by itself, is sufficient to suggest additional downside travel.

We can expect a partial upward retracement after such an insistent and rapid decline. Nevertheless, it seems nearly certain that the bullish rally in a bear market is over and done with, and that we can expect to see lower prices.

These patterns are fair warning: It’s almost time to put up the hurricane shutters.

William G. Kurtz Jr.
http://www.candlewave.com/candlewave.htm