Harami Candlestick and Bearish Divergence

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The chart above is SPY as of today's close. Price gapped down at the open today then managed to climb back to fill the gap in the early afternoon. However, it was met with immediate selling and price fell the rest of the day. This created what is called a "harami" candlestick. It is composed of a large candlestick (like yesterday) followed by a small candlestick (like today) whose real body (the fat part) is entirely inside the real body of the large candlestick.

This is not a pattern that I get too excited about, but it does often lead to a retracement of the current trend. Here are a few other points to look for when analyzing the quality of a harami pattern:

1)The longer and stronger the trend in force, the more significant the pattern

2) Pattern occurring at or outside bollinger bands helps to assure that price is at a statistical extreme and may be ready for reversal

3) If the large real body day is the largest real body of the move, I believe the pattern is more reliable as it approximates a short-term climax top

In the chart above you can see that price touched the upper bollinger band yesterday. The upper band has been a stalling or major topping point for every rally of this bear market. We should be on the lookout to see if things go differently this time as that may indicate a change in character for the market. Also, the real body of yesterday's candle was very large and news related which makes me more willing to believe it was a short-term climax point. There is also a shorter term technical divergence on the hourly chart of MACD and RSI.

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This is a 55 minute chart of SPY. In the last post I showed that a bearish divergence was forming on the 90 minute chart MACD indicator as price made new highs yesterday. On this 55 minute time frame, there was a bearish crossover in the last price bar of the day.

The short-term model never made it to the overbought area today. However, this may actually indicate weakness because it has created a divergence between price (going higher) and the indicator (making lower peaks). On account of the factors I discussed already and the intraday double top, I entered a half-sized trade on SDS shortly before the close today. My price was 76.65 so that will become the new recommended limit price for this trade.

Modified Trade Recommendation....

Place (or modify) a "day only" limit order to buy SDS at 76.65 for tomorrow (Wednesday).

Pete