Homing Pigeon

There are many ways to look at a stock chart. I prefer candlestick charts. One of the reasons I like candlesticks is the funny names given to some of the patterns. Given Monday’s action, I dusted off Greg Morris’s book Candlestick Charting Explained to get the name of this two-day pattern. I think it’s called a Homing Pigeon.

Quoting Greg’s book directly,

“The market is in a downtrend, evidenced by a long black day. The next day, prices open higher, trade completely within the prior day’s body, and then close slightly down. Depending upon the severity of the previous trend, this shows a deterioration and offers an opportunity to get out of the market.”

I reckon we could debate whether or not the market was in a downtrend, as three down days does not make a trend ... nor do four. But, in my view, this is semantics. Friday was a bad day for the NASDAQ. Monday offered some relief, but not nearly enough for any reasonable technician to conclude that the bears have left the field.

That said, to be clear, I rarely make any decisions based on a candle pattern. So, I’m quoting Greg, not necessarily agreeing with him. If you’re making your own trading decisions, you need to make your own trading decisions.

Sponsor Message From Author, C. Theodore Hicks II, CFP, CKA, CMT:

South Korea

One of my watchlists is of Single Country ETFs. Unfortunately, we are not in EWY, but I’ve certainly noticed it as it has been at the top of my watchlist for a while. Prior to the recent sell off in the markets, the iShares South Korea ETF was up ~123% year-to-date. So, since EWY has had such relative strength, when we experience a bit of a selloff, I want to look for opportunities to hop on strong trends. So, how did EWY do on Monday?

EWY was up 5.96% on Monday – more than double the next best ETF on this watchlist. Furthermore, while we see the Homing Pigeon pattern again, this time, the entire price action was at the top of Friday’s range. Technically, it was still fully contained within Friday’s body. But the fact that it opened so much higher and was able to close so much higher, that’s another sign of strength.

From our standpoint, we will want to see it build out a little bit of a base before buying. But Monday’s action was another encouraging sign.

Bonds Still Not Safe

In my book, Evidence-Based Investing, I write about how my conviction is that we can no longer count on bonds to act as a portfolio stabilizer. My contention is that we need to manage risk differently in our current environment. While we were living in a 40-yearlong Secular Bull Market for Bonds, yeah, sure, bonds can be your stabilizer. But we are no longer in that environment. Bonds should not be your portfolio stabilizer!

Just take a look at the chart for IEF for clarity.

That’s an ugly chart. From the February 27th high, IEF (iShares 7-10 Year Treasury Bond ETF) was down ~5%. Now you’ve got both the 50-day and the 200-day moving averages sloping down. Those are not encouraging signs.

Friday’s action was a stock market selloff, right? Well, IEF had a pretty bad day that day too. And yesterday? Yesterday, we got a bearish engulfing pattern on IEF.

Nope, bonds should not be a portfolio stabilizer.

Hopefully, after today’s session, there will be more positive things to write about.

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