A pause in price action on Thursday was not unexpected after the strong rally on Wednesday. The pause, however, could be the second leg of a three-day bearish reversal pattern possibly under construction on the SPDR S&P 500 ETF (SPY) chart. This would be the same bearish pattern that marked the October 16 SPY high and which was followed by a 6% decline in the fund price. History may be repeating.
SPY shares rallied 2.25% on October 16 forming a large white up-day candle. This was followed the next day by a narrow opening and closing range “doji” candle. On the third day there was a drop in price that formed a large dark or down-day candle. This three day sequence many are familiar with is called an eveningstar formation.
An eveningstar is a bearish reversal pattern that suggests a transition in investor sentiment from bullishness to bearishness. It is often seen at markets tops. In the case of the October 16 eveningstar, it was a temporary top that was followed by a 6% drop in price.
This week’s Wednesday rally took SPY shares up 2.1% and high was right around the $281 level. Thursday’s narrow opening and closing range formed a doji-like candle. Nearly identical to the initial price action seen on the SPY ETF in October.
The weak futures this Friday morning indicate a lower open and if there is continued downside in the session, it would complete the third candle in the previous sequence. A second eveningstar would form on the SPY chart. That would be a bearish development that could be followed by another significant retracement.
Of course, if the SPY were to stabilize and move back up though $281 resistance it would be a very bullish development.