Is the Stock Market Going to Consolidate, Pop or Drop?

Tom Gentile

Posted in Technical Analysis

By: Tom Gentile on August 23rd, 2022 • 3 mins read

The markets had a bearish day yesterday the likes it hadn’t seen in weeks.

When the markets sell off big like that one things that can happen is the markets bounce a day or two or three afterwards. The range of the trading days in these following days can be narrower, (not as big) and they tend to form in the candle body or bar of the big drop day.

When the trading days play out like this the western technicals term is they are forming Inside Days, where the range of the bar or candles are held pretty much inside the high and low of the big drop day.

In Japanese Candlesticks they are called ‘Harami’ days; loosely meaning pregnant or body within a body.

Figure 1: Bullish and Bearish Harami
Figure 1: Bullish and Bearish Harami

If there are say three harami days the security may be forming a rising or falling three methods pattern.

The Harami day could be a reversal signal and the rising or falling three methods is usually a continuation of the trend pattern.

Neither of those patterns appeared today, but we will be keeping our eye out for them

Today’s Market Action Signaled a Day of Indecision Between Bulls and Bears

Today formed more of a Doji Day. Doji is a Japanese Candle where the high and low of the day is small and the body, which signals the open and close of the day is pretty much the same price.

It signals indecision in that there was no clear winning sentiment between the bulls and bears. The stock did not trade significantly higher or lower on the day.

Depending on where the Doji happens it can either play out to be part of a continuation pattern or act as a place where the security reverses course.

For us, we need to see another day or two price action to see if the Doji becomes part of a 2 or 3-day pattern.

Here is a Bullish and Bearish Doji Sample:

DOJI Candle

Depending on the length of the wicks/shadows *the vertical lines above and or below the candle body and where they candle body is placed *high or low part of the range the Doji can have a specific Doji name attached to it. Three examples of names or types of Doji are the Gravestone, Dragonfly or Long-legged Doji. All signaling indecision.

Bearish Days Brings out Many Questions

Bearish days like yesterday had the financial markets bringing on guest after guest asking is the rally over? Can it continue? Where do we go from and sectors and / or stocks are you looking at.

They always ask those last questions, but when the market sells, they really try and focus on where the ‘experts’ see value and or opportunity. Today, the bearish day was followed by a day of indecision.

One can look at the Morning Report Lists to see where the bullish and bearish options activity is as a way to assess possible market direction and then have ideas to discuss with their broker on what options might be worth considering.

App: Toms Option Tools

Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.

Other times I will have other charts may work to amplify my educational points. 

Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.

Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.