Wednesday, October 21, 2009

Recent market action -- Bearish Engulfing on 3 Day

SPY price action shows a Bearish Engulfing (BE) pattern…one of the strongest, but by itself does not mean a big move….but a likely good size move.   I am using a 3 day chart to remove jumpy price movements.

Some analysts have prematurely called this an outside down day (or 3 day if you use my charts). On a classic candlestick approach, it does not show the BE on the daily.

Certainly the 3 day duration candle has just formed the Bearish Engulfing, but has yet to signal an even better Outside Down. For that we need another close below today's close, and ideally on the 3 Day candle The daily did not have the open higher than the previous body top, and the close higher than the body bottom. Thus this is not a daily bearish engulfing, much less an outside down day.

"Non-candle" readers may read this differently, But the open and close mean so much, and forgetting them and just looking at high and low of day, I think are erroneous. Candles aren't everything, but they sum up human emotion in a quick easy to read package, and dumbing them down is highly questioned in my book.

As my recent charts have stated...this could possibly be the top, but no assurance.  Some Bears have been so slobbering over themselves for any sign of a top that they have set themselves up as sitting ducks (bears).

But if it (the current 3D B.E.) gives the indices enough of a kick to break that lower trend channel, then a real drop could ensue.   And if this current 3D BE confirms with an outside down CANDLE, then expect about a 70% chance of a 7% drop.

Stats are primarily from Bulkowski who has a few great books, a website, and blog. Check out his work, and buy some of his books.

I just have to wonder how many retail investors will be buying the dips….they July dip was pretty good size.

But let’s keep it real…last year we had dozens of days that had 5% to 10% DAILY moves on the indices, and now all the sudden a 0.6% drop indicates the start of Armageddon.    Just saying….keep things in perspective, by reviewing history.

Recency bias affects all of us, we are human, we can’t avoid it. However we can swat back the recency bias by a good review.

>I did "your review" of prior price swings for you. The first chart shows a nice symmetric triangle, ready for a move. The second chart looks more like some kind of Polynesian War Club or something, but useful for stock trading historical perspective, check it out.



  1. look at XII, headfake. They are buying the dip..


  2. J, what is XII? Please identify ticker.

  3. Steveo

    Do you know if there is an indicator or market parameter that shows, for example, new daily closes at high-of-day, closes at low-of-day, etc? I have not seen any in stockcharts or other sites.


Insightful and Useful Comment!