The reversal candle has become commonplace over the past month. NFLX was one of the first momentum stocks to report this quarter, and its reversal candle by the close after earnings was quite a rare sight:
That was a nearly 20% selloff from peak to trough in just one day, on huge volume, after opening at an all-time high.
Since then, we’ve seen a number of such reversals, particularly among the largest year-to-date winners. Recent examples on earnings have included BIDU (new all-time on earnings, but closed lower) and Z (1 month high, closed lower), as well as FB and LNKD if you include the after-market price action (new all-time highs immediately after earnings report in after hours trading).
Yesterday, we saw two such reversals on breakouts in two of the most widely watched indices in the world: the Dow Jones Industrial Average and the Euro Stoxx 50 Index. The DJIA broke out to a new all-time high on Wednesday, and looked to confirm the breakout (above the 15700-15725 area) yesterday morning on a clean gap higher. However, the day ended with another reversal bar:
The Euro Stoxx 50 index broke out to a new 5 year high (above its 2011 high) on the news of the ECB rate cut, but also faded by the end of the day, closing below that important breakout level (around 3075):
The index is down again this morning, confirming yesterday’s failed breakout.
Ryan Detrick of Schaeffer’s Investment Research flagged the spread of this phenomenon in individual stocks (a la NFLX) last week, noting the increase in buying climaxes in the last week. He noted:
A buying climax is when a stock makes new 52-week high, then closes red for the week. A cluster of them (like last wk) can signal weakness.
Now that major indices also have made similar buying climaxes (if the SPX and DJIA close lower this week), the concern about buyers has likely increased.
In my view, as long as those failed breakout levels are not broken to the upside (a big IF given this year’s market behavior), the cards favor the bears at the moment. I’m generally looking to sell rallies rather than buy dips.