Today the sp500 printed what looks like a perfect hanging man candlestick. Since the entire rally starting in early September 2010 I have not seen such a perfect hanging man candle. It is called a ‘hanging man’ candlestick because that is exactly what it looks like, a man hanging with his legs dangling. Today’s hanging man candlestick has a very small candle body and quite a long bottoming tail which is ideal. It also has ZERO upper shadow and a red candle body instead of a green candle body. A red candle body is slightly more bearish on the hanging man candlesticks. Note that a similar hanging man occurred in the early August 2010 time frame as shown in the chart below. Today’s hanging man is slightly more bearish than that candlestick because we have no upper shadow on today’s hanging man candlestick.
Without any knowledge of candlestick patterns, one might think that today’s action was extremely bullish and a win for the bulls. Not quite.
At this point I cannot say it is a win for the bears or the bulls because despite today’s potentially bearish implications of this hanging man candlestick, it is still unconfirmed. It would be confirmed with a close below today’s low. The reality is that many potentially bearish candlestick patterns since the early September 2010 lows have simply been ignored or invalidated. Time after time they have not been able to get confirmation as bearish indications. If we do get a confirmation of today’s hanging man, then I am going to view it as a significant event given how lousy a record of previous confirmations have been.
I am sticking with the BOT Short Signal as of today’s open in the sp500 which was 1183.84. I understand that whipsaws as of the recent few weeks are extremely frustrating. I suppose the one lesson out of this is that tops in the general market indices require extreme patience before one can be confident of any meaningful trend change. I have uttered these wise words several times before, but still to this day I do not think I have fully absorbed their wisdom.
Hanging man candlesticks are ideally confirmed by a nice big gap down below the low of the hanging man candlestick. So in a perfect world for the bears we would get a nice big GAP DOWN tomorrow and leave the hanging man isolated right where it stands today. If that occurs it is going to rocket my confidence in the short side of the market even higher.
Steve Nison describes the dynamics of the hanging man psychology best in this book Japanese Candlestick Charting Techniques:
Usually in this kind of scenario the market is full of bullish energy Then the hanging man appears. On the hanging-man day the market opens at or near the highs, then sharply sells off, and
then rallies to close at or near the highs. This might not be the type of price action that would let you think the hanging man could be a top reversal. But this type of price action now shows once the market starts to sell off, it has become vulnerable to a fast break. If the market opens lower the next day those who bought on the open or close of the hanging-man day are now left "hanging" with a losing position. Thus, the general principle for the hanging man; the greater the down gap between the real body of the hanging-man day and the opening the next day the more likely the hanging man will be a top. Another bearish verification could be a black real body session with a lower close than the hanging-man sessions close.
So if you are bearish, cross your fingers for a gap down tomorrow to leave all the bulls ‘hanging’ from their supposed confident reversal today.
The summation index ticked down again today and the 5 day EMA crossed below the 10 day EMA. Also the RSI of the summation index busted below the 70 percentile line confirming that the market is in a vulnerable spot now.
There is absolutely no fear in this market and despite today’s mini decline. The ARMS closing today is basically saying to me that no one expects any surprises next week and that we just power higher from here. If the closing ARMS gets to the 3 to 5 range then I will start to believe that at least some capitulation is building into the market. On the other hand, for the bear case it would be ideal for the ARMS to stay subdued if the market continues to break down. This would be a similar scenario to the April 2010 top when ARMS took quite a long time to reach very oversold readings and by that time the market was 1000 points lower.