Should the Stock Market Bounce be Careful Thinking Bullish 

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
August 29th, 2022

3 mins read

Equities got crushed last Friday, with the Dow closing down a bit over 1.000 points. We could have seen a continued drop today, and we did, but not as severe as it did to end the week. It is possible some dollar cost averaging comes in to play and we see a bounce for a day or more, but do not get too bullish if we see that play out.

Last article spoke about setting the Fibonacci tool on the SPY chart to assess a possible support level lower.

That does not mean we expect it to be a straight drop down to those levels if it indeed happens.

 The markets do not trade in a straight line up or down and again, buyers could step in to pick up stocks at these lower prices from last Friday.

Continuation Pattern that May Resolve Itself before the Markets Trade Lower

OHLC bars are labeled as such because they show the Open, High, Low and Close price for that bar (which could represent a day, week, or month period of time).

Japanese Candlesticks also visually show the Open, High, Low and Close of a period, just in a different visual manner.

One may see a green or red candle body for a period. Red indicated prices for that period closed lower than they opened.

What sometimes happens is what’s called a Falling Three Methods pattern. Here are some of the characteristics or rules that should happened for that pattern to be valid:

The first candle is long and bearish (red or open candle body) and continues the downtrend

The next three candles are short and, as a group, form a short-term uptrend. Ideally, they would close within the first candle’s body

The fifth candle is long and bearish again and its Close price is lower than that of the first candle

Take a look at the image provide to see a visual representation of that pattern. Note it may not always play out and visually look as perfect as the image shows.

Image 49

Today did not have a close within the candle body from Friday, but if the next couple of days do this is a pattern that may be forthcoming.

The caution we provide is that if we get some upward momentum in the markets, but the days are contained within Friday’s candle body it all might just lead to a continuation of lower prices to come.

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