The good news is that the S&P 500 has moved off its February lows to return to a resistance area that marks historic highs and in yesterday’s session there was a “golden cross” on the daily chart, as the 50 day moving average moved above the 200 day average. The bad news is that the index has been having difficulty breaking to new highs for over a year now, and a series of bearish candles have formed as latest test of resistance is taking place.
The suspect candles can be seen in the “thumbnail” on the right side of the chart. A large opening and closing range doji candle formed last Wednesday after two strong up days, and it was followed by Thursday’s large down candle. This three-day transitional series of candles is called an “eveningstar” pattern and is often seen at market highs. On Friday another large doji candle formed and in yesterday’s session a second consecutive candle formed with a narrow opening and closing range. If this last candle had formed after a downtrend or near a support level it would be considered a bullish hammer candle, but the fact that it formed near highs changes the interpretation of the intraday action. A hammer-like candle that forms near highs is called a “hanging man” candle and, while it looks identical to a bullish hammer candle, its connotation is negative and it is considered a potentially bearish reversal sign. Like all technical candles and patterns it requires confirmation and in this particular scenario, confirmation needs to be quick and decisive. The resistance zone has to be penetrated soon, before the upward inertia of this rally off the February lows is lost. A loss of confidence in this latest run at new highs could lead to profit taking that morphs into panic selling.