Tuesday, December 4, 2012

Bearish Engulfing Pattern

Bearish Engulfing Pattern on IWM
Click on Chart to Enlarge

The SPY etf formed a bearish engulfing pattern Monday after filling the post election gap down and touching the 50 day moving average.  This may be program selling and initial profit taking on this move up, but suggests a multi day pullback should be expected.  Given the lower volume on the day, it may be weak program selling, and a push to new highs above Monday's highs, would like lead to some follow through to the upside.

In the larger context this could be the peak of a somewhat typical backtest of the broken Oct 2011-June 2012 trend line.  From my research and data on harmonic trading pattern analysis, the most common candlestick pattern that shows up on backtests of broken trendlines after completed successful bearish harmonic patterns, is a bearish engulfing pattern.  Again, the back test often peaks in the region where the trendline break took place on the chart, or at a fill of a gap down that broke the trendline.  Both are applicable here as well, though this pattern in the market averages is not the type of pattern my research specifically quantifies.

Additionally this bearish engulfing pattern is occurring as the RSI has approached 60 which is often the rough upper boundary for RSI in a downtrend.

On the weekly time frame the set-up has developed nicely for a dual time frame indicator short sale set-up.  The weekly MACD on the indexes is still in a sell configuration and this little rally has given the opportunity for a bearish cross on the daily MACD to possibly continue a primary downtrend.  The indicator set-up will be one to follow the next couple weeks.

You can learn more about the bearish engulfing pattern at this link.

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