These Bars and Candles May Hold the Key for 2025

Most of the time, when we study bars or candlesticks, our attention is focused on daily and intraday charts, since they give early warnings of a possible change in the short-term trend. Nonetheless, it occasionally makes sense to step back and take a look at monthly bars and candlesticks. Not only do they offer some perspective, but very few traders follow them. That means those who do are in a better position to spot signals overlooked by the majority.

After all, a candlestick pattern formed with two monthly candlesticks will, in principle, have the same implication for future prices as those based on daily data, but for a much longer period. For that reason, I find it helpful to save two chartlists for multiple markets and sectors. One is dedicated to bars, the other to candles. Most of the time, following monthly bars is pretty boring, as few technical events show up. That said, the latest data for November and December are littered with cautionary flags for equities.

NYSE Composite

We'll start off with the NYSE Composite ($NYA), as it has traced out a bearish two bar reversal. For a brief explanation of such formations,please refer to a previous article written late last year. Two-bar reversals are usually expected to have an influence on prices for between 5-10 periods. In this case, the bars are monthly, so, if the current pattern works out, it should be effective for several months into the future.

Technical analysis deals with probabilities based on the weight-of-the-evidence approach. That means that, however bearish a one- or two-bar or candlestick pattern may look,it must be confirmed by additional evidence. In this instance, a violation of the up trendline would suffice. That's because the trendline's importance as a support level is being reinforced by the fact that the 9-month MA is in the same vicinity.

The lower window of the chart shows that this price action could also be interpreted as an engulfing pattern. I have placed the word "engulfing" in quotes as the upper real body for December's price action does not strictly engulf that for November. However, it still represents a battle between buyers and sellers which the sellers won. Sometimes, in technical analysis, we need to use common sense instead of relying on the strict application of  rules for their own sake. By way of demonstration, the bullish September/October 2022 engulfing pattern is even more questionable, yet it was the first signal in an important rally.

Chart 1 requires confirmation with a monthly trendline and MA violation, but Chart 2, featuring the daily action of the $NYA, indicates that confirmation has already taken place, since the Index and its Special Khave both violated their post-2023 up trendlines.

The NASDAQ

Chart 3 shows that the NASDAQ has had a beautiful run that climaxed in a gravestone doji. That's a candlestick where prices open up close to the low and shoot up intra-month, only to fall back to their opening level. It reflects buyer exhaustion following a long period in which they were in control. In this instance, the gravestone followed an upside break above the 6-month resistance trendline. Confirmation that the gravestone will "work" would come from a break below the 9-month MA at 17,805. That's because such a move would also push it back below the green breakout trendline.

Small Caps

Finally, Chart 4 features the Russell 2,000 ETF (IWM). It has also traced out a negative pattern in the form of a bearish two-bar reversal. This is a special breakout because the first month opens below the resistance trendline and closes well above it, whereas the December close returns the price to the starting point below the line, leaving the bulk of traders coming home with a loss. Usually, patterns such as this represent sufficient confirmation in themselves of a false breakout. That, for example, was the case in October 2021 for the Pinocchio bar indicated in the chart. In this instance, though, it would make sense to wait for the joint trendline and 9-month MA violation below 2015 to be sure.

Some Final Thoughts

The formations described above are bearish, but we should not necessarily expect prices to drop sharply coming out of the gate. That's because these patterns, just like classic ones, are susceptible to retracement moves as bullish sentiment is occasionally revisited. Only when prices register new highs above the patterns' high are the formations themselves invalidated.

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.