Gauging Where the Market Is Headed
If you're unsure about where the broader market is headed in the short-term, you may want to wait for the below candlestick formations to play out -- they may provide some hint.
The underlying price action of the morning star pattern reflects a little more than a bounce, but a little less than a base. It is a three-day bullish reversal pattern that forms in downtrends, usually at support areas or key moving averages. The first component of the formation is a large dark candle with a close near the lower end of the range, followed by a candle with a narrow opening and closing range, often a doji candle. The pattern is completed by a large white candle with a close near the upper candle range.
The formation represents a transition from bearishness, to uncertainty and, finally, to bullishness -- and it is one of the more reliable candlestick reversal patterns.
Hertz (HTZ), Red Hat (RHT), Avery Dennison (AVY), Zimmer (ZMH), AutoNation (AN) -- Daily
Source: StockCharts.com
The chart above includes five stocks that are all in the final stage of forming a morning star pattern. They saw large down days, followed by narrow range days, and they are now attempting to finish with a strong day to the upside.
At the top of the chart is car- and truck-rental company, Hertz (HTZ), shares of which have been trading in a channel for the last month. The stock's narrow range day tested channel support, and channel resistance is being reinforced by its 50-day moving average. Next is cloud-computing company Red Hat (RHT), whose stock has bounced off its 50-day average and is now attempting to break above resistance in the $51 area.
Shares of Avery Dennison (AVY), which manufactures pressure-sensitive materials, are above its resistance level but below their 50-day average -- and the same applies to shares of medical-device maker Zimmer (ZMH). The chart of automotive retailer, AutoNation (AN), shows the stock price moving above its 50-day average, but just under resistance.
These stocks are a diversified representation of sectors, all going through a similar transition phase. The strategy is to allow the process to unfold, using the requirements of the morning star pattern and the clearly defined levels of resistance to initiate the trade and reinforce your conviction on short-term direction of the broader market.
At the time of publication, Moreno had no positions it the stocks mentioned.