Chart of the Day: "Outside" reversals

The S&P 500 posted another "outside" day yesterday. These types of reversal days are defined by the stock or index trading below the previous day's low, and then reversing to close above the previous day's high (and vice versa). Thus, on the chart the range for the day is outside of the previous day, both on the upside and downside.

Looking at the chart above, we see that on 9/2, the S&P 500 posted an outside day to the downside (a negative reversal). This was a good signal that more downside was in store for the market in the near-term. Subsequent to that signal, the SPX fell another -5.1%.

Looking at yesterday's action, we see another outside day, this time a positive reversal. Traders will take this signal to mean that there could be some further upside in the market in the near-term. So far today, this signal is working. The market opened lower this morning, but then found support, and is currently working its way back into positive territory.

The energy and materials stocks have been leading the action all day. The dollar is down sharply today, which is not surpising given the run its had and how overbought it had gotten. This is helping spur a big bounce in commodities.

Also, the PPI showed a -0.9% drop in August, reflecting the recent move down in energy prices. I have said how this is a big positive for the consumer, and that is likely why the Univ. of Michigan Consumer Confidence report for September jumped to 73.1 from 63.0 last month.

There are still plenty of problems out there with financials, and this weekend should be busy for the guys working on deals for Lehman (LEH) and Wamu (WM), but it is always important to take note of the positive developments as well.

long SDS