Hanging Man. A Market Warning?
Last week, the market showed more volatility than it has in many months. The sequester, Bernanke, economic data, and Italy all grabbed headlines that led to dips and rallies in the market. It made for a rather unpredictable trading environment and started to signal warning signs to the short term and mid term bulls. Fundamental occurrences like the rally in the US dollar and Bonds show that investors are not as bullish as they were a few months ago. While most technical indicators still favor the bulls, warning signs like the Hanging man are starting to sneak up.
The hanging man is the opposite of the bullish hammer and is sometimes referred to as a bearish hammer. The hanging man is a candlestick pattern that is often seen after strong bullish rallies. While not always a reliable signal, the hanging man is a warning sign to the bulls that buyers are fading.
Last week’s end of week rally helped to erase weakness seen during the beginning of the week. This price action created the hanging man patterns on the SPY, DIA, and IWM. Below are the charts of each index etf and there are two things worth noting. The 1st note is that all 3 are still in strong uptrends. The second note is that all three uptrends are mature and now have hanging man warning signs. A break below last week’s lows would be rather bearish for the markets in general. As a trader, the hanging man just signals caution. It confirms the market consolidation that we have seen over the past weeks. If the hanging man’s highs are broken, the market will likely rally on, if the hanging man’s lows are broken, a steep drop is likely to follow. Right now, the market is in no mans land and should be traded accordingly.