After months of doom and gloom in the U.S. equity markets and a virtual freefall from the highs of late 2007, this weekend I finally see something on the weekly chart of the Dow that gives me reason for optimism.  I'm not speaking of the fact that last week was the best week of 2009 for U.S. markets, though that is certainly a positive sign.  Rather, I'm speaking of the fact that the weekly Dow chart is showing a strong positive MACD divergence.

A divergence is a fairly reliable reversal signal that consists of a series of lower lows (or higher highs) in price accompanied by a failure to make lower lows (or higher highs) in a corresponding oscillator.

Taking a look at the weekly chart below, see that we hit a new low in price back in November of 2008 around 7500.  This was accompanied by a new low in the MACD.  We established a much lower low in price last week around 6500, but this low was not accompanied by a new low in the MACD; the MACD actually made a higher low - a bullish sign.

We needn't look far to find an example of a MACD divergence that successfully predicted a turn in the market.  In fact, there's one on the chart above at the peak of the bull market back in 2007 portending of the coming bear market.  The Dow made a higher high in July 2007 corresponding with a higher high in the MACD.  In October 2007, the Dow made a slightly higher high, but the MACD made a lower low, and the rest is history - we've made nothing but lower highs and lower lows since then and the index has dropped 50%.

I can't say with certainty whether the current positive MACD divergence that we are seeing on the Dow weekly chart will ultimately correspond with the end of the current bear market.  I can say, however, that it is definitely a positive sign, and it may provide a good opportunity for investors who have gotten out of stocks to start to get back in.  Only time will tell whether this turns into a true market turning point.

The Euro broke its down trendline last week and established a higher high.  The safest way to play a trendline breakout to wait for a pullback, and that's exactly what I'm doing.  The pair has pulled back nicely, and if I see a bullish candle or two in the near future, I think I'll jump on board and see what happens.  But for now, I'm just watching and waiting.  Hopefully, it won't decide to take off while I'm asleep tonight.

Below's the 4 hour chart of EUR/USD.

I've entered a long position in USD/JPY tonight.  The pair has been in steady downtrend for several months and is finally showing signs of taking a breather.

The pair rallied nicely in the second half of December, breaking the down trendline.  The pair has fallen since the beginning on January, but now appears to be making a higher low and turning north again.  The bullish engulfing pattern on today's daily chart is what caused me to pull the trigger and bet on USD/JPY rising.

Ok, so it's not a true bullish engulfing pattern.

Today's open was slightly higher than yesterday's close (by about 10 pips), but what I see on the daily chart is enough like a bullish engulfing pattern to make me feel comfortable entering a long position.  The action over the past two days shows bears pushing the price down yesterday at the end of about a week-long downtrend; today the bulls took over with conviction, pushing the dollar up past yesterday's high.  So, while it's not a true bullish engulfing pattern, the reasons for trading a bullish engulfing pattern are there.

So, I'm long with my stop just below today's low, betting that this pair will rise.  However, as my last trade showed me, I could be wrong!

• Long Entry:  89.994
• Initial Stoploss:  88.450

Edit 1/19/2009 7:30 PM: After moving up for a couple of days, the pair as retraced a bit today. Though my position hasn't yet hit 1R, I've moved my stoploss to breakeven, which is below today's low, to protect my capital. Hopefully tomorrow will see USD/JPY resuming its move up.

Edit 1/20/2009 9:00 PM: My stop at breakeven was hit today, taking me out of the trade.  After an initial thrust up, the pair didn't seem to have the follow-through that I had expected.  So, I'm happy to be out with a scratch trade.  The pair may resume its move up, but for now, I'm happy to sit on the sidelines and watch.

I've decided to exit the second half of my EUR/USD short because we've got a nice long signal on the daily chart.  Usually I wait to exit profitable positions by relying on my trailing stop to take me out, but the action on the daily is telling me that this pair will rise.  Of course, I could be wrong!

Today we see a nice pin bar forming on the EUR/USD daily chart.  What do I like about this pin bar?

1. It exists within a clear trend.  The medium-term trend is down, and if the pin bar holds, it will signal the end of that trend.
2. The longer-term trend on the daily chart is up, and the pin bar suggests that the pair will resume its prevailing trend.
3. Its nose extends well beyond any recent lows and "sticks out."
4. The pin bar is bouncing off of an area of confluence.  There's an area of support that has been tested in the recent past as both support and resistance indicated in the chart below by the two horizontal dotted lines.  Also, the bottom tip of the pin bar touches the 61.8 Fib level off of the low on 11/21/08 perfectly (I generally don't pay too much attention to Fibs, but I keep them in the back of my mind and will look at them occasionally since so many people use them).

So, for my Euro short position, I bank 213.8 pips on the first half and 293.9 pips on the second half.

I'll enter a long order just above the top of the pin bar and catch it on its way up if the pattern holds.

• Long Entry:  1.3667
• Initial Stoploss:  1.3485

I came across an interesting article tonight by Gary Smith called "Quit Waiting for the Big Blowoff" that is extremely relevant to today's market, though it was written during the last bear market in 2001.

In the article, Smith asserts the market bottoms are rarely formed by large blowoff, or capitulation days.  Though these bloody days may form short-term bottoms, they're rarely permanent  True bottoms are generally accompanied with little fanfare or excitement.  As the author puts it, "most bottoms are formed due to one thing:  Sellers simply go away."

Smith supports his argument with history by including a study of capitulation days in 1929, 1973, and 1987 that were followed by a lower bottom or at least a sideways market in the following months.

The lesson here is summed up nicely by Smith:  "Buy when the folks are sleeping - not when they're bleeding."

So check out the original article for an interesting read.