Wednesday, January 11, 2012

S&P 500: A Hanging Man

Update: The S&P 500 opened Thursday within the body of Wednesday's hanging man candlestick, thereby failing to confirm the signal.

The S&P 500, which is tracked by the exchange-traded fund SPY, closed on the daily chart with a hanging man candlestick pattern. This pattern, if confirmed, can indicate a reversal of the current trend.

Candlestick charting is based on techniques that Japanese rice traders used several centuries ago. In a hanging man candle, the opening and closing prices are near one another, at the very top of the trading range.

This open-close range is called the "body" of the candle, and lines extending out from the body to the high and low are the wicks.

A hanging man basically looks like a letter "T" with top that's a little bit fatter than the stem. It has a narrow body, no upper wick or a very small one, and a somewhat longish lower wick.

The S&P 500 has been in an uptrend since Dec. 20, 2011 -- or 15 trading days. The upswing began at 1202.37 and has risen to a high of 1296.46.

Now, this hanging man may in fact just be a wannabe. A perfect hanging man has an open and close that are above the previous day's high. The hanging man candle, in other words, should set a higher high.

That's not the case today, where the high is 1293.65. Also, there is a small upper wick, like a small wart. It keeps this hanging man from being a truly beautiful hanging man. And the upper wick lengthened the last few minutes of trading.

Confirmation won't come until Thursday. If Thursday's open is below the body of the hanging man, that's confirmation. If the close is also below the body, then that's an even stronger confirmation.

As I noted in Tuesday's analysis, "S&P 500: Triangle Breakout", there is always the possibility of a false triangle breakout, where the price has sufficient momentum to throw itself over the triangle boundary, and then quickly retreats. A hanging man pattern in this position suggests that a retreat is imminent.

But, of course, candle patterns can fail as well.

The dirty little secret of chart patterns is that they always work, until they don't.

Ronald Reagan famously said, "Trust but verify." I say, "Play the pattern, but stop the losses." Not as catchy on Ron's pithy saying, but equally true.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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