Bears Make Progress But Lack Conviction
The market showed signs of consolidation yesterday. The lack of important economic news translated into low volume and little price movement on the exchanges. Losers on the day were banks, which I view as an ominous sign. The financial sector was only down a measly 0.5%, but that was enough to outpace most other groups.
Additionally, the minor push lower at the open and the sideways move during the day for stocks resulted in doji candles on the daily charts. These doji candles formed within the entire price range of the prior session, which makes them doji haramis.
The harami pattern is not nearly as confusing as the name suggests. The pattern is also usually a sign of a reversal. In October the large presence of harami candles was a reason why we went aggressively long despite the bearish sentiment in the mainstream.
The harami reversal needs three things to happen before traders can reliably conclude the trend has changed. First, the pattern needs to begin with a huge move in the same direction of the prevailing trend. Next, the day after that big move, momentum slows, and there is a hint that the trend is exhausted. Lastly, the pattern is confirmed when price completely changes direction and begins to move back to a level where it was prior to the huge move on day one.
The most obvious harami reversal is found in the Russell 2000. But I have outlined a few more in the section below.
The Russell 2000 had a great session to finish the week last week. Last Friday the Russell 2000 motored 2% from 812 to 831. But on Monday the price opened slightly lower and closed near 828.
The Russell 2000 met the first two requirements. But for now it lacks the third and final requirement. For a successful harami bearish reversal to occur the price needs to come back down and erase Friday's huge up-day.
With only two of the three steps required to form a top, it is risky to go aggressively short here. But the value of this pattern is that you now know exactly what to look for to confirm a topping formation.
I prefer to trade harami patterns as bottom formations. And the harami for UNG on January 20 was a big factor in my decision to trade natural gas as a potential bottom last week.
Opposite from the bearish haramis formed yesterday was the bullish move to GNOM. Shares of our biotech stock exploded 16% on the session. The initial target for the GNOM trade was $3.65 on a bull flag breakout from January 27. Two weeks later the stock came within $0.03 and looks ready to push higher. Volume has been excellent thus far and I have increased my target price to $3.95 this morning.
