A Bearish Engulfing at the Highs: SP500 Planning

Will the clear Bearish Engulfing Candle at the highs result in a logical sell-off in stocks?

Let’s chart Monday’s candle, note what accompanies it, and how to plan the week ahead.

First, note the weakening bullish trend in stocks and the two sideways consolidations in 2015.

February saw an impulsive breakout to new highs and as we transition into May, stocks are threatening a new breakout and bullish short-squeeze through new highs.

However, one obstacle that stands in the way of the bullish pathway is the Bearish Engulfing Candle.

Let’s zoom-in on this popular reversal candle and put it in context:

Bearish Engulfing Candles occur when the high and the low “engulf” or exceed yesterday’s high and low.

They often occur when an opening gap or morning strength results in a reversal day that closes near the low.

In this case, price gapped and traded to new highs but buyers could not sustain the breakout; sellers struck and price reversed into an intraday downtrend.

We note the negative momentum divergences as price scrapes against the upper Bollinger Band – and the prior February high – and note that logic favors the downside.

Thus, for planning purposes, we’ll call the Dominant Thesis the Bearish/Sell-Swing Thesis as price could move down away from the new high toward any support target including 2,100, 2,085, or even 2,065.

The Alternate Thesis – where we’ll expect a bigger price movement as traders are trapped – would thus be the Bullish Breakout and Short-Squeeze impulse similar to what we saw in February.

For even more context, here’s the Weekly Chart:

While the trend is persistent, volume and momentum are forming lower peaks – divergences.

We’ll have the Federal Reserve meeting announcement Wednesday along with many more earnings from leading companies, but as we monitor the real-time price action, keep it all in context of the chart-based short-term bearish evidence and the possibility for yet another surprise bullish breakout.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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