The Rare Price Action Pattern

The Rare Price Action Pattern

In the blog post two weeks ago, we've talked about a possible pause in the stock market's uptrend. That pause is currently underway but can it be something more? Can this sideways movement turn into a full-scale correction?

S&P500 analysis

The picture looks a bit bearish. The On Balance Volume seems to be a little bit weaker than the price itself. This is happening on a seasonal top as indicated by the blue line, below the chart. During the current down move, there is no volume spike, an indication of a possible continuation downward.

From a price action perspective, the move started from the all-time highs with the 1xT down candlestick. The next candlestick was down again, with a 1xN shape. There was a third consecutive down candlestick, on Thursday, only this time it was an outside 1xN

On the next day, the market went to the midpoint of the prior day's Nose than turned toward the high. So far all was as it was suggested in The Talking Chart. But something happened and the price came down finishing as a 1xT inside day

Looking at the daily chart, the pattern looks very bearish, especially the last two candlesticks. Traders probably see this in a way “if the lows are penetrated what can stop the decline reaching the green target zones?” But the test is showing something else.

That pattern appeared only nine times since 1997. That is quite rare. What is even more interesting is that the pattern led to an up move in 70% of the time. That percentage increases to 80% if the high of the inside day is penetrated. Actually, it is 100% if a stop-loss adjustment to the true low is made. The price can break below the low, it happened on a few occasions, but that doesn't seem to lead to a significant move. At least, this is what history shows.

The down move so far was of four consecutive candlesticks but fairly small. Actually, it is more than two times smaller than the average size of a down movement consisting of four down candlesticks. If the current move is going to catch the average, the fifth consecutive (if there is one) needs to be more than 3%! That will be a monstrous down day. But nothing really suggest that.

So far the market is holding above the prior top and the Commercials are buying more on those higher levels.

If I am reading it correctly, the crowd will be selling on Monday. So, if the market has the power to overcome that bearish-looking chart and to break above Friday's high I would be looking for long signals. Breaking below Friday's low has to be examined further because it can bring a lot of sellers, who will try to catch to newly formed downtrend. But then a sudden up move will catch them by surprise and use their shorts as fuel for the rise. Still, 3830-3850 looks reachable.


Now, let's find your missing piece!

Vassil Banov,
Founder of Piece of Trading

Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
Seasonal indicators courtesy of Larry Williams, Charts made with TradeStation®.

TAGS: S&P500, SPY, SPX, COT, Commitments of Traders, Price Action, Price Action Trading, Talking Chart, Pattern

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