Island Of Misfit Bears


  • Jason Goepfert

    Jason Goepfert

    Published: 2020-02-10 at 11:00:00 CDT

Island of misfit bears

S&P 500 futures carved out an island formation over the past 3 sessions. This is when prices gap up above the prior day’s high, have a good day, then gap down below the high day’s close. It leaves the high day kind of sitting on an island by itself.

It looks ugly on a chart and would be a clear bearish pattern among technicians. It also formed a "hanging man" for those familiar with candlestick formations.

S&P 500 island formation

Historically, its record has been mixed. It looks ugly on a chart, and it did pinpoint several important peaks. Very short-term returns were below random, but beyond the first few weeks, there was no negative edge in the risk/reward ratio.

The rise of passive fund flows, along with high-frequency and algorithmic trading, have made price patterns less reliable than in years past and this doesn't look like a consistent reason to become negative beyond maybe a few days.


Commodity plunge

Commodities have tanked on global health fears. Among these falling commodities is oil, which is down 5 weeks in a row.

Crude oil momentum

When oil fell 5 weeks in a row, it usually experienced weakness over the next year since many of these historical cases occurred within the context of an oil bear market.

Crude oil down 5 weeks in a row

Does this mean that U.S. equities will fall as well, since "coronavirus fears can spill over into the global economy"?

Historically, long DOWN streaks weren't consistently bullish or bearish for the S&P 500: 

S&P 500 after oil drops

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The post titled Island Of Misfit Bears was originally published as on SentimenTrader.com on 2020-02-10.

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