The Shape of Thursday's Bars is a Red Flag

Posted by jbrumley on August 31, 2023 6:16 PM

Earlier in the week we talked about the importance of seeing shapes in and on stock charts. Just as important is seeing and understanding the shape a single bar. That is today, the any bar’s (one single day, on a daily chart) open, high, low, and close can tell you a good deal about what’s likely to happen next. When put in the proper context with the bars immediately preceding one day’s action, it can tell you even more.

It's a point worth making following Thursday’s intraday reversal into the red. In and of itself it doesn’t mean a whole lot… particularly given that stocks had made several days’ worth of gains leading up to Thursday’s session. The shape of Thursday’s bar, however, is telling.

Take a look at the daily chart of the NASDAQ Composite below. The open and the close are both near one another, and both are in the lower half of the day’s low-to-high trading range. The market tried to rally early on, but ran out of steam mid-day to end up giving back nearly all of the intraday gain. This hints that traders started the day with some bullish momentum but were nearly out of gas, unable to keep the movement going. If that is indeed the case, Thursday is also a pivot out of an uptrend and into a downtrend.

Underscoring the likelihood that Thursday is at least a near-term peak is the multi-day rally from the mid-August low. The market is ripe for some profit-taking here.

The S&P 500’s daily chart looks about the same, albeit with one small-but-important difference. That is, the S&P 500 ended up closing at its low for the day, giving back all of its intraday gains and then some. This sweeping reversal from healthy bullishness to decided bearishness again hints that the bullish effort is out of gas. The rally from mid-August only further sets the stage for more selling.

Were neither of these charts looking like they do after today, the matter might not even be worth bringing up. That is to say, if the S&P 500 actually opened deep in the red and clawed its way back to a smaller loss, we wouldn’t consider this a potential pivot point. In the same vein, has the NASDAQ been falling for the past several days, a bar shaped like Thursday’s would be a signal that the bulls are getting tired. Context is everything. The context here is that stocks are well “up” for the past couple of weeks. At least some people are ready to take profits. Thursday bar suggests they’re starting to test those waters.

But what about last Thursday’s similarly-sweeping loss that started out as a gain? That was rough, and the bulls started overcoming that stumble the very next day.

There’s no denying the bulls get some credit for their resilience. However, if anything that’s a red flag that there may be more would-be sellers waiting in the wings than first feared. Look at how easily that happened. Sure, stocks bounced back. The volume behind the recovery effort, however, was even weaker than the tepid buying volume seen before that (and through Wednesday).

In this vein, notice that the S&P 500’s volume actually perked up on Thursday once the selling got going. Again, it suggests there may be more sellers on the sidelines ready to get in the game than it seems like there are with just a passing glance.