US Index Bearish Engulfing Candles, Leading to… ?

It’s as its name implies. A Bearish Engulfing candle is a red bear candle that is outside of the previous candle’s high and low and thus engulfs it.  Day traders will see these and should prepare for a negative market reaction measured in a day or two. Longer-term position holders should consider them a blip, with the trends being far more important. The headline indexes on the US stock markets are a perfect example right now.

Here’s how NFTRH 587’s US Stock Market Segment began…

Back in the here and now however, what we have technically is the VIX shown on page 4 allowing for a market bounce and Friday’s daily chart candles implying more downside.

I’ve highlighted bearish engulfing candles on each index. A word on daily chart candle formations… their efficacy is measured out in a day or two and are pertinent mainly to day traders. Maybe a quick drop and recovery is upcoming (among other options). But for now I’ll bet there are a lot of traders getting wigged out about the engulfing candles.

The black arrow shows the projected open for SPX. That takes out the very short-term EMA 20. It looks similar to the December 3rd event, whatever that was. Another gap is down just above the 50 day moving average, which has not been tested since October. About time for an overbought, overloved and semi-manic stock market. Coronavirus? You’re on.

The warning here is that 3300 was the second upside target (3200 was the first) with another still well higher at 3500 and now looking unlikely, at least pending a real sentiment cleaning event in the markets (these bursts of fear can eventually become fuel, and I’d keep on file the possibility that this could be the event that fuels this pig into the election later in this still-young year).

Meanwhile, a hit of the 50 day average keeps the market at what most people would still consider ‘on trend’. But those gaps; they exist and thus must at least be considered.

spx

Below are two VIX charts we used in #587. This one simply shows that on Friday the VIX spiked and reversed at the 200 day moving average. This left open the possibility that if the hysterical virus news died down over the weekend the market would get relief. It might have been another micro blip in anxiety.

vix

Well, that is not to be (side thought: ‘what the heck are these people doing all clustered together like that? There’s a terrible Coronavirus on the loose, let’s have a mass demonstration!… Photoshop?).

Staying with the VIX, we have had this chart in focus over the last couple of weeks. It shows a divergence between the VIX and and an inverse view of SPX the likes of which corrected the market pretty hard in 2018, but only gave it a blip in 2019. Right now it’s a blip, as the Bearish Engulfing candles do their thing. But it could develop into much more. Time – and risk management – will tell.

vix

But if SPX above decides to start filling more gaps than the one it already has, this will have signaled a stronger correction. We went over downside targets, only one of which can even be seen on the daily SPX chart at top. The lower one would be considered extreme by many. I don’t see it that way.

Okay, let’s see how the drama plays out.

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