Bearish Hanging Man Reversal Pattern

Following last night's trading post, we had some interesting questions on the correct timing and entry of the bearish hanging man candlestick reversal pattern.

Let's go over Steve Nison's criteria:

We recognize both the hammer and hanging man (HM) from:

• the real body is at the upper end of the stick's range;
• the lower shadow should be at least twice the length of the real body;
• No or very tiny upper shadow.
• The longer the lower shadow, the shorter the upper shadow and the narrower the body, the more meaningful the pattern.
• In terms of stating the obvious, when used as reversal patterns, the hammer would come after a decline and the HM after a rally.
  

My notes - this second last point is a problem when it comes to stops, that's why I don't like to trade off of a wide HM or hammer. I usually wait for a lower risk entry point. I also prefer my hammers to be green and my HM to be red, but Nison says color is less important.

Confirmation of HM:

Nison says that at a minimum we need a lower open on the following stick, below the real body of the HM, but he usually recommends a close beneath the HM.

He also mentions that the pace of the rally should be slackening. The best way to determine this intraday is with the RSI which measures relative strength.


On the POT trade yesterday, which carved out 2 HM, the first of which was foreshadowing a reversal, we clearly see a negative divergence of the RSI to higher prices relative to the previous session.

On the FWLT chart, also from yesterday, we see the continued strength in the RSI when price prints a HM early in the session. This would not have been a good candidate to short following HM because the rally has yet to show signs of slackening.

The RIMM chart from today, shows 2 HM after a retracement. The RSI is clearly not enthused by the higher prices and this sets up a perfect short. If you use volume as the indicator, the entire retracement took place on declining volume.

NQ Futures Trade - Geithner Plan

Another buy the rumor, sell the news story from Washington. Remember we had a nice pop on the rumor of the bad bank plan on January 28th. Now, when the actual details of the plan, or lack thereof, are announced, we sell.

The X-List - BAIDU.COM, INC. (Public, Nasdaq:BIDU)

BIDU has been on my watch list since exhibiting range contraction on the daily chart in mid-to-late January. I caught a nice trade on Jan 28th. Since then, it has displayed whippy consolidation action until today. Early today, BIDU was my %change leader and drew most of my attention.

The daily chart (left) was a nice setup - notice the convergence of multiple moving averages - leading to today's gap up. The 10 minute chart (right) has key levels highlighted. The first entry (first arrow) easily fits under Trader-X's New Simplified Rules (ah, but which setup?). I entered on the 7th 10m bar, although an aggressive entry could have been made off of the 5th 10m bar. The first exit was at the 1.38 Fib extension. The second entry was off of a narrow-range inside bar at the opening range high (ORH) which gave much lower risk than the first entry - also exited at the 1.38 extension, but it almost reached the 1.62 extension.

Profit Taking - Potash Corp./Saskatchewan (USA) (Public, NYSE:POT)

POT took out PDH and extended 50%, printed a big hanging man, retested the highs but couldn't push through R2. The second hanging man, strategically placed at R2, provided a very good clue that POT was going to come into some profit taking.

SCO and BIIB were from the gapper focus list. BIIB was a coil and move back to ORH, followed by a long, almost painful, wait for the anticipated C&H to develop.

SCO was an ORBO with extension following the gap fill consolidation.

SLB, also from the gapper list, was a good intention for a H&S BO, but I missed the entry. Hope you got involved.

The key criteria for H&S tops are big volume on LS and Head and relatively little volume on the RS. SLB meets the criteria and delivers a fast trade - gap fill and perfect measured move - 100%

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Technical Picture - Markets Bounce Back

The markets shrugged off negative data with the indices opening firmly higher despite weaker than expected Non-Farm Payrolls (-598 K, largest decline since 12/74 vs. consensus of -540 K). Markets put together a minor extension into midday with another minor round of buying in the afternoon. The weak data wasn't surprising, but traders are now focused on the potential vote/passage of the stimulus package/plan to stabilize the financial system. Short covering has been key in the recovery over the last few sessions as some of the most heavily shorted sectors (finance, banking, homebuilders and transports) have been providing upside leadership.

According to IBD we're in a confirmed rally with caveats, as the markets contuinue to live and die with headlines and runours. The NASDAQ is outperforming as we can see from the chart above. It is positive for the year, but still needs to take out and hold the January reaction highs to confirm a reversal. For now the markets are somewhat extended.



In the meantime, Geithner postponed his unveiling of the administration’s plan to shore up the financial industry from Monday to Tuesday, as officials focus on getting approval for the economic stimulus plan.

Click on charts/pics to enlarge

2008 was a bad year all round - economy, movies, and music. In a year with too few really good films, and even fewer good discs, tonight's Grammy's promise to be a bit of a snooze. Coldplay (always a favorite here) shouldn't have any trouble sweeping.

MA - Pivot holds as support - 3rd test of pivot support is the charm.

V - ORBO followed by 3 tests of the base.

HIG - original short was scratched. Eventually carved out a solid B&B at the half dollar level.