Dark Cloud Cover NDX -- lower?

Discussion in 'Technical Analysis' started by ShadowTrader_08, Nov 10, 2008.

  1. ShadowTrader_08

    ShadowTrader_08 ET Sponsor

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    Good Morning, Traders. Today's issue is about a technical phenomenon called "dark cloud cover". This is the term given to a certain candlestick pattern as described by Steve Nison in <i>Japanese Candlestick Charting Techniques</i>. For what it's worth, this book is one of Peter's faves and has made it to the <i>Recommended Reading List</I> on ShadowTrader.net, an accomplishment on par with being listed on <b>Oprah's Book Club.</b> As yesterday's trade formed a dark cloud cover on the charts, we figured it was an excellent time to focus on this pattern.

    <img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081111DCC2.gif">

    The chart above is the <b>$NDX</b> (Nasdaq 100) daily magnified a bit to show Monday's and Friday's action clearly. In a nutshell, dark cloud cover occurs when a market makes a white candle on the first day, then gaps up over the highs of that candle but subsequently sells off into the prior day's range. Generally, the more that the candle retraces into the prior day's range, the more bearish it is. To be a true dark cloud cover, the first bar should usually have a larger body, however what matters more is whether or not the first bar closes at its highs or not. The close at the highs gives bulls a sense of security as they take positions home overnight. Then when the market gaps up the next day, their profits are amplified a bit. Once that gap fills, the more that it retraces into the prior day's body, the bulls get nervous and begin to dump their postions to protect profits. Yesterday's action went all the way through the prior day's body and even crossed the lows. This is also an example of a <i>bearish engulfing day</i> but thats for another day...

    The chart below shows that dark cloud cover signals are actually quite accurate. Its the same chart as the above, just pulled back to show all the daily bars of the last six months. Note how every single occurrence of dark cloud cover led to lower prices very soon after.

    <img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081111NDX.gif">