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Thursday, March 28, 2024

An Outside Year?

Courtesy of Joshua Brown, The Reformed Broker

In technical analysis, when you hear the term bullish engulfing pattern or bearish engulfing pattern, what they’re talking about is a candlestick chart – usually a daily – where today’s low price and high price are below and above the high and low of the previous day. If the close is higher, it’s a bullish engulfing pattern. It’s a bearish engulfing pattern if the candle resolves lower. This can also be referred to as an positive or negative outside day, which many traders call a “reversal pattern”, meaning it has the potential to change the prior trend.

In a new note this morning, Citi’s technicians look down at a variety of asset classes from 10,000 feet. On the yearly S&P 500 chart, they note that we’re likely going through a consolidation that leads to higher prices once resolved. Further, they note that 2016 has the potential to be a “bullish outside year” for the S&P 500 – meaning the highs and lows for this year’s candle are both outside of 2015’s range, with a close above last year’s high.

If this were to happen on the candlestick for 2016, it would be only the 3rd time in history the S&P 500 posts a positive outside year. The last instance was at the start of a dramatic bull market for stocks – 1982 – when 16 years of brutal consolidation were finally shaken off and the 1966 top was left in the dust.

Here’s Tom Fitzpatrick & Co:

Screen Shot 2016-07-01 at 9.13.17 AM

While the bar is very high there is a chance that the S&P 500 could post a bullish outside year for only the 3rd time since 1935. The other 2 years were 1935 and 1982. They were followed by 28% and 17% up years respectively (Albeit 1937-1942 were not “pretty years” for a variety of big picture reasons.)

The period we remain most closely focused on is the 1982 bullish outside year. This followed a tumultuous period from 1966-1982 in the economy/housing/equity markets/Oil and geopolitics and was the start of a resumption of the long term uptrend.

Today the S&P sits just 31% above the high posted 16 years ago in 2000. In 1982 it finished the year just 50% above the 1966 high and then proceeded to post another 7 up years in a row. In 1982 the DJIA closed the year just 5% above the 1966 high (also posting a bullish outside year). This time around it is 48% above the 2000 high and could not post a bullish outside year as it did not trade below the 2015 low (At this point). A yearly close above 18,351, if seen, would still be a bullish outcome.

Worth considering.

Source:

Weekly Roundup: A 10,000 foot view of financial
CitiFX – June 30th 2016

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