Bullish Counterattack Candlestick Pattern
Dramatic fall and quick recovery prints a rare candlestick pattern
Economic historians study events like the Panic of 1893, where an economic recession and dwindling gold reserves maintained by the U.S. Treasury led to bank runs across America. The situation did not fully resolve itself until 1897. In our modern world time is compressed and we get our panics over with in a matter of days, if not hours. Years from now, we all will remember where we were for the Great Panic of August 5, 2024.
Maybe that is exaggerating things a little. Still, the Nikkei was down 12% on that day. The U.S. market opened down 5% the same day and that is not counting the ugly second half of the previous week.
The interesting thing, from a technical analysis perspective, is that the un-panicing that ensued over the rest of the week formed a textbook Bullish Counterattack candlestick pattern on a weekly chart of the S&P 500. It is the subject of our chart in focus for this week.
A bullish counterattack happens in a declining market. Hopefully this is self-evident; Bulls can only “counterattack” if they are on the defensive. The pattern involves two candles. The first is a long-ish black candle adding to the near-term downtrend in the market. The second is a long white candle where the open is well below the previous candle and the close is approximately equal to the prior close. This is exactly what transpired for the S&P 500 over the last two weeks.
Well, that’s nice. But what does it mean?
These two candles together are a visual representation of a change in the market. The long black candle marked the third week of declines in a row. The market closed near its low for the week and then gapped down even further to start the following week. Clearly, the bears were in control. But the bulls finally mounted a counter-offensive and managed to rally the market all the way back to where it had closed the week before. Momentum is on the side of the bulls. The most likely direction from here is up.
At this point we should remind that the behavior of the stock market is a social science and not subject to laws of physics. While the market is more likely to go up from here than to go down, it is far from a certainty. New information could alter the future path of the market. Some other data not embodied in the candles may turn out to be important.
Furthermore, a bullish counterattack pattern is actually slightly less bullish than its cousin, the piercing pattern. The two patterns can look alike, with the important difference that the piercing pattern will gain back some of the prior candle’s losses (i.e. the new candle “pierces” the body of the previous candle). This only makes sense. If the market can rally to not only meet the closing price of the previous candle but materially exceed it, that would be an even clearer sign of a strong bull market.
More charts
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Ryan Detrick, CMT shows us what happens next after the market declines by more than 1% on Thursday, Friday, and the following Monday.
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Numbers only
37.5% - The percentage of bears jumped to 37.5% from 25.2% the week before according to the latest AAII Investor Sentiment Survey.
7 cents - Real estate service company Zillow lost 7 cents per share in the latest quarter, a smaller loss than analysts expected and smaller than the loss a year ago. Shares were up 17% on the week.
221 - The big market decline on August 5, 2024 produced 221 new 52-week lows on the NYSE, compared to a long-term average of around 47.