Usually, when we are identifying one or two bar price patterns or candlesticks, it's because they appear close to a turning point, thereby giving us a trading edge. From a practical point of view, it makes sense to observe daily or intraday price action. That's because a short-term trend reversal will already be well underway if we wait for the longer-term charts to turn. That said, I like to occasionally review a chart list containing open, high, low and close data based on monthly information by way of searching for one and two bar patterns.

In the vast majority of situations these charts tell me absolutely nothing. Occasionally, though, they offer pearls of information not being transmitted from those daily and intraday charts. Working on the assumption that one or two bar formations mostly have an effect for 5-10 bars, this information also has longer-term (5-10-month) significance. A specific pattern therefore sets the scene for a new emerging intermediate trend.

In reviewing my chartlist for monthly bars yesterday, I was struck by several examples of outside bars. Outside bars develop when the trading range of the latest bar totally encompasses that of its predecessor. That phenomenon can be observed in Chart 1 for the Dow. In order to gain significance, a bearish outside bar must experience certain characteristics. Think of it as a chart reflection a of a battle between buyers and sellers. First, it should be preceded by a rally. In other words, there must be something for it to reverse. That was definitely the case for the Dow last month; the recent overbought reading in the RSI also confirms the overstretched nature of the market. Note that it has recently re-crossed its overbought zone on its way back to equilibrium. The red arrows on this and the other charts show that this kind of behavior has usually been followed by a multi-month correction of some kind.

The second outside bar characteristic, already discussed, is that it must encompass the trading range of the previous bar. This one though, earns extra points. Not only does encompass December's price action, but also all those bars going back to last summer. In other words, it reflects a huge battle between buyers and sellers. The sellers won, in this instance -- or did they?

A further characteristic for an outside bar is that it opens near the previous bar's close, indicating the dominance of buyers. Last month's bar qualifies in that regard. Finally, by way of reflecting the dominance of sellers, the price should end the month well into the lower half of the monthly range. This one, as well as that of the S&P Composite in Chart 2, end exactly at the half-way point, close to their respective nine-month moving averages.

One final point about the validity of any one- and two-bar formation is that the pattern, in and of itself, is only one piece of technical evidence. Consequently, to increase the probabilities that the pattern will "work", some additional evidence is required. That could take the form of a trendline violation, a moving average crossover, etc. In the case of these two charts, a decisive month-end close under the nine-month MA should suffice.

My conclusion from this is that on-balance monthly action is bearish. However, this view is somewhat clouded by the close being well above the intra-month low. Further complicating the picture is the fact that weekly data is presenting us with some positive evidence.

Weekly Action

In that respect, Chart 3 features a weekly candlestick chart for the NYSE Composite. A clear intraweek break took it below its recent trading range and 52-week MA. However, by the time of the Friday close, it had managed to "hammer" its way back to the trendline breakdown point and, this week, has exceeded it. That suggests the break was false, but we will need confirmation of that with a move to new highs.

In the case of the S&P Composite, the downside break was not so blatant, being limited to the 52-week MA.

Sectors and Monthly Outside Bars

Drilling down to individual sectors and industry groups, two areas stand out; semiconductors and energy. Semiconductors experienced a monthly outside bar. However, unlike the Dow and S&P Composite in Charts 1 and 2, the SPDR Semiconductor ETF (XSD) closed the month much closer to its low. The bar was also much wider in relation to its two predecessors, which reflects a much bigger battle between buyers and sellers than took place in the Dow or S&P Composite. The bottom line is that it's far more likely to be followed by negative action.

On the other hand, energy, unlike most sectors, demonstrated a complete absence of any sort of bearish outside bar, as it has broken above its 2014-2021 down trendline, achieving a new bull market high in the process. Not much doubt over which is the strongest sector on the board at this time.

Conclusion

Several indicators tried to violate 9-month and 52-week moving averages last week, but escaped with a late-month rally, which also threw some doubt as to the validity of  several monthly outside bars. Going forward, it will be interesting to see whether this week's rally is sustainable or whether it turns out to be a dead cat bounce, to be later followed by negative 9-month  and 52-week MA penetrations  and lower prices.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.