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Lots of wedges form on 60-minute charts

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I didn't mean for yesterday's morning comments and some rather interesting action from "buy/sell" computer programs from Tuesday, to become a focus of attention for traders. I did however feel it was interesting commentary to let traders know just what impact that could have on trading, when a string of programs gets triggered. Yesterday morning, when stock markets were open, we did see some major impact once again.

I want to solidify that these types of program alerts are just that. They are very short-term ALERTS to potential stock price action that could be influenced by computer generated programs in a basket of stocks, which can then influence index price action.

This morning, traders have been observing offsetting buy/sell program premium level execution alerts. A sell program alert is triggered, but minutes later, a buy program alert is triggered. This had one subscriber asking the question, "Now I've got my alerts set, I'm getting the alerts, but they are alternating buy and sell and coming quickly. What does this mean?"

I can never be sure, but it has me looking for some answers in the charts. First line of thinking is that there is some type of "indecision" from the various programs. One is a seller, one is a buyer, and they are being triggered at some level, where there is major disagreement.

We look at point and figure charts to get the "big picture" of supply and demand, and also look at daily interval bar charts to get a bigger picture of things.

A trader trying to "understand" the current alternating buy/sell programs wonders about "levels" where these programs seem to be getting set.

The 60-minute charts show that the Dow Industrials (INDU) have rallied right back to a near-term level of past support, that when broken, the Dow fell a spectacular 500 points in 2 trading sessions. My best estimate is that the Dow is currently at a level of major indecision, and we can perhaps see this in the 60- minute chart interval.

Dow Industrials Chart - 60-minute interval

Early morning support on the Dow's pullback came right at the 8,430 level of retracement, and looks to be holding. The early morning highs came right at a recent level of past support at 8,540 and we did see some sell programs, combined with buy programs triggered near that level.

Near-term, traders are most likely monitoring upside strength at the 200-pd MA of 8,590, which has not been tested or broken in the past month. If 8,590 were broken to the upside, look for a rally right to downward trend as MACD on this time frame looks bullish as it move above zero. From there, near-term rally potential exists to 8,856.

Near-term, I wouldn't be implementing sizable put/call positions in such a near-term "neutral" type of technical pattern.

While I'm looking at the Dow Industrials here, traders will most likely find similar technical in other stocks they may currently have position in, or looking to trade.

Stock like Amgen (AMGN) $46.67 +2.07% are not showing similar technicals, in fact, the technicals have begun to turn much stronger than that shown in the Dow Industrials. What I'm doing as soon as I write this update, is continue to hold my previously initiated 2 AMGN Sept. $45 puts, but hedge by going long 200 shares of the stock, then using the $45 puts as protection of any downside event. Current upside on a break above the relative $46.64 high has retracement resistance (discussed yesterday) at $49.76 and now looks to serve as a bull's target.

Conversely, a stock like PMC Sierra (NASDAQ:PMCS) $7.65% -3.53%, looks to be headed the other direction, as the stock violated a 52-week low earlier this morning at $7.57, when it traded as low as $7.48 intra-day.

Jeff Bailey
Senior Market Technician
Option Investor

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