A Japanese Candlestick Chart Pattern Indicating the Markets May Continue Lower

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
May 5th, 2022

4 mins read

The Markets Digested the Fed and Continued to Slide

The markets like certainty. I said this previously in my Toms Newsletter for May 04, 2022.

Based on today’s price action and the fact the markets had it’s worst or one of its worst trading days for 2022, it seems they only liked what they heard yesterday.

It usually takes a day or two for investors to digest the announcement and what the Fed says before they make their decision on what they are going to do with their money.

The S&P 500 rallied off the Fed yesterday to the tune of basically3% only to be followed up today with a sell off of 3.5%.

We’ve seen strong up days followed by a retrace over the next 2-3 days within the range of that strong up day, but to see it be followed up by this dramatic a means isn’t seen that often. However. This year and most recently when the markets have a strong up day it has been followed by the markets decline in price, but usually over a couple to three days – this was an immediate sell off.

Some would say this is indicative of a Bear Market and strong up days are really only Bear Market rallies.

One thing we want to point out in this article for today is a Japanese candlestick Chart Pattern that may indicate there is more downside possible.

Falling Three Methods

Image 6

The Falling Three Methods pattern is a 50day pattern and thought the last 5-trading days isn’t cookie cutter to the formation shown it sure is similar enough to us to prompt this education.

It is a pattern found in down trends, (where the reverse, a Rising Three methods is found in up trends).

It doesn’t guarantee the trend will continue, but it shows a stall in the trend and may actually end up being a continuation pattern, meaning the pattern forms signaling the trend is likely to continue and often it does.

For the Falling Three Methods the first fay of the five is a strong, large bearish day. The second, third and fourth days are small, narrow range candles (typically bullish), that are usually confined within in the candle body of that first bearish day. The last, fifth trading day in the pattern is another strong bearish day, (and by strong bearish day I mean the length of the candle body is significantly larger than days 2-4 of the pattern (as seen in the image shown).

From here, should the pattern play out, one can anticipate more downside price action to come.

One thing that is different with the last 5-trading days that completed today is the fourth trading day -Fed Day as we called it – had a larger than normal bullish day and it wasn’t confined within the first bearish candle body. 

Also, the fifth day, today didn’t close lower than the low of the first day – which isn’t an absolute rule, but more of a confirmation of weakness if it had.

Image 7

That is why I said this last 5-days was similar.

Jobs Report

There is one thing that disrupts or alters current technical analysis and that is news.

A news announcement can come about and alter investors views on the state of the market and that causes price action to form and provide a current technical picture reflecting that sentiment.

A news announcement that could of just that is the Jobs report due out tomorrow morning.

We will get those numbers before market open, and we will see what that means for a) the price action for the markets pre-market and the open and then once those numbers get digested and investors make a decision on what that means to them for the markets going forward we will see what it b) means for price action the rest of the day.

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