This week the S&P 500 index reverted back to and closed on its 50 day moving average. It is a logical technical level for a bounce, but penetration of this key average could signal a second phase to this week’s decline. I’ll be looking at the price action in the Monday session and the candle that forms on the daily chart as a tell for the short-term direction of the index. Here are some possible outcomes illustrated on the chart and their implications going forward.
1. Bullish Piercing Candle – There is an opening gap lower on Monday and then the index moves up into the center of Friday’s candle, closing near the high.
2. Bullish Two-Day or “Tweezer” Reversal – The candle opens at Friday’s close and closes up at Friday’s open.
3. This a classic “doji” candle often seen at turns in the market or as a component of the three-day Morningstar reversal pattern.
4. The bullish hammer candle has a narrow opening and closing range and long tail, and often “hammers out a bottom” at key levels of support.
5. This neutral “spinning top” candle has a narrow opening and closing range centered around a wider range of price movement, and reflects indecision about future direction.
6. The bearish shooting star candle is the reverse of the hammer candle and reflects a failure to hold its upper range, with the close fading back to the open.
7. This large dark “marubozu” candle opens on its high and closes on its low, like the candles we saw in the Wednesday and Friday sessions and we don’t want to see in the Monday session.
Of course, there are any number of ways the price action on Monday will unfold, but I will be alert to the formation of any of these particular candles.