One simple reversal pattern to watch for is called the "bearish engulfing" pattern. Bearish engulfing simply means that the current bar's high
is higher than the previous bar's high, and the current bar's low is lower than the previous bar's low, thus the current bar "engulfs" the previous
bar. What makes it "bearish" is that the current bar closes below its open. I've color-coded my charts so that the bearish engulfing
candles are solid blue.
The Chinese internet stocks (SOHU, SINA, NTES, etc.) have been on a tear this year, but I think yesterday might have marked a major top for this
group. They appear to have completed a five wave advance and the high volume bearish engulfing patterns yesterday are a sign that the ABC corrective
wave decline has probably begun.
I'd be inclined to play these guys from the short side for now... of course I could be terribly wrong and they could go on to double again, but I wouldn't
bet on it.
You can see in the 10-minute chart below how Johnny-come-lately buyers got trapped. These players, who are now suffering large losses,
will provide the selling pressure in coming days to force the price lower. The brutal reality of short-term trading is that once
players are stuck, and price continues to move against them, any rally is apt to be short-lived.
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