They alert you to so much more. The huge red candles really alert you to the selling pressure and the huge white candles are a good reminder that the bulls are in charge, in the near-term.
However, there are candlestick patterns that help alert you to potential reversals. I love these patterns because they give you a "heads up" before the bulk of the selling starts.
One such pattern is called a "bearish engulfing" pattern. Others refer to it as an "outside day reversal". Both refer to the same thing. It involves the two candles to the far right of the chart below. The latest (far right) candle "engulfs" the former candle by first trading higher than the previous candle but then also, later on in the day, trades lower than the previous candle too. Thus it "engulfs" the previous candle.
Like I said, they're also referred to as "outside days" because of the same reasons. They denote a high probability of a blow-off top where there's initially a lot of optimism early on in trading in that particular day's trading session and then later on it gives back all of the days gains and they turn into losses and the trading session closes much lower on the day (and especially lower than the previous day).
Well right now, I'm seeing this happen on two indexes right now and I believe it's a HUGE warning sign that the other indexes could be about to take a tumble too.
I've zoomed in (going back only three months in time) so that the candles appear larger, in order to make it easier for you to make out the pattern I'm referring to. Note the huge reversal on the Russell 2000 Small Cap Index below.
Now, in the next chart, you'll get a better view of what it looks like when stepping back to a larger view, like the 1-year chart.
You want to pay particularly close attention to these patterns when they're stretched very far away/above their major moving averages and when other indicators are signaling potential weakness as well. Notice the slumping RSI and MACD and how far the price is away from the moving averages relative to any time in the past year. It's a huge warning that there could be a large reversal downward.
I'm also seeing this same pattern on the Dow Jones Transportation Average too. Check it out below.
Notice how overbought its RSI is and how its MACD Histogram is diverging lower while the price of the index is stretched very far above its major moving averages relative to what it's done in the past year. These are all huge warning signs on the charts that signal that there may be a huge reversal. It's a "heads up" to be prepared and to not get caught off guard.
These are very timely patterns. So we'll know within the next few trading days if there's a true reversal or not. But these are real-time warning signs that you should probably be lightening up your positions that are highly influenced by the overall market and that have tracked along with them.
It's a great time to be holding a ton of cash right now, in light of an overvalued market, fundamentally, and chart patterns and other technicals that are screaming to us to be extremely cautious right now.
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