The Hang Man Candlestick; is it dangerous?

5 August 2013


A hangman candle stick appeared last Friday in DOW.  It has long lower shadow and a small head,  resembling a hammer.  


What is a HangMan ? 

It is called a hangman and not a hammer because it is a bearish sign.  If it is confirmed,  it can often bring stock market to its knees before it could recover again.

Hangman reversal patterns are often seen on the very top of the uptrend.  There are many reasons why hangman is so bearish.  Many explain that it is because the uptrend is almost exhausted and the bulls are losing control for various reasons.

What has happened?

This present uptrend is driven all along by QEs.  When Bernanke announced the thinking of QE tapering in May,  the market responded with an immediate sell down.  The 10 year treasury yield jumped more than 10% in a single day.    

Although Bernanke and other FED members talked up the market in July,  many Wall Street analysts and bankers still hold the view that FED would  start QE tapering in September this year and would end QE next year because:- 

a)  Bernanke's tapering was based on US economy to turn better in September and also unemployment rate to be  lowered to 6.5% next year.  No one in a clear mind would believe him because of the slowing growth in China and all over the World;

b)  On the contrary,  most analysts believe in what Mr. Mohamed El-Erian, the CEO of PIMCO,  had said about "less positive reason" for tapering which is the side effect of QEs.  Mr.  El-Erain thinks that FED is tapering because it has started "to get more and more worried about what Mr. Bernanke has called the costs and risks of prolonged unconventional and experimental policy".

As money are easily available for tradings,  Funds and Bankers often use derivatives for hedging purposes to protect their trading investments or as part of their investment strategy.  These derivative tradings involve risks and the portfolios investing in derivatives could lose more than the principal amount invested.

For example,  after Bernanke announced its intend to taper QE,  US bond yield jumped. This has caused many Hedge Funds and Bankers to lose $billions over night.  Pimco Bond Guru Bill Gross admitted the Fund has lost about 4% of its $265billions PIMCO Fund requiring the need to withdraw about $10 billions to make up the losses.

Treasury bond derivative is only one of the larger ones played by the Hedge Funds and the Bankers. It was estimated that the bet on interest rate derivatives had reached about $400 Trillions and the total sum of the derivative trading has exceeded $700 Trillions Worldwide and expanding at a rate of about 30% per year.

Is this DOW's Hangman Candlestick Dangerous?

This  occurrence of  Hangman is considered dangerous because it happened right after the FED's tapering announcement where the jump in Treasury yield had caused a lot big Funds and Bankers to lose money.  They would have to find money to make up the losses.  Although DOW has managed not only to regain its losses but also making another new high,  it would not help to cover up the loss bets in the Treasury bonds.  DOW has gone flat since 22 July with many trading days having sold off at the start and recovered only at the end of the trading sessions.  This trading pattern was a common sight during the 2007/2008 market when market was topping and bulls are running out of "bullets".

Will We Need  a Confirmation Signal?

Hangman candlestick pattern is often considered less reliable reversal signal in a way that the bulls are still actively engaged in the trade;  therefore,  there is a need to see a strong down day in the following trading days for confirmation.   Should this pattern be confirmed,  it can often bring the stock market to its knee before it can recover again.  The confirmation should be either a gapped down or a long red candlestick or a combination of small down days.


Update 1:  8 August 2013  Hangman is Confirmed


After having formed the hangman,  DOW was been slow in confirming the bearish pattern.  It took a total of 3 down days and finally,  confirmed reluctantly with a weak down candlestick as it broke the supporting line.   May be many investors are still hopeful that QE tapering will not come.  Because of the weak confirmation,  these hopeful investors may retry to re-capture loss ground if there is an opportunity.  The real downward movement will come only when the retries failed to go above the supporting line as shown.
In the weekly chart,  DOW has also formed a breakaway bearish pattern yet to be confirmed as the week is not over. It will aim at covering up the 2 small candlestick gaps as shown.   Similarly,  a bearish engulfing is beginning to take shape in the monthly chart.



Why not check S&P, Nasdaq and other Charts

Traders should not just refer to one chart alone for trading.  As this blog is for learning and not for trading purposes, it would leave it to the traders to do their homework.  Since there is this question,  it would be good to examine the other charts;  for example,  S&P and Nasdaq.  It would appear that both S&P and Nasdaq have been affected by the hangman in DOW.  Both S&P and Nasdaq's fall have not been confirmed

Update2:  20 August 2013

After having formed the hangman candlestick,  DOW went ahead to break the 50 MA last Thursday and broke the 100 MA yesterday as shown in the following chart.

DOW has also broken 2 necklines;  1st,  last Thursday when DOW broke the 50MA and yesterday, when DOW broke the 100MA.    When DOW broke the 1st neckline last Thursday,  the volume was not high and therefore,  that Head and Shoulder pattern was  not confirmed.  As for the present neckline2,  the volume is again low as Monday is usually a low volume day.   However,  it was observed that there are many call options still trapped in the system and they will stop trading this Friday.  It is expected that volume will pick up and this would confirm the second neckline.  Once that were to happen,  DOW will head towards to test the 200MA line.

Update 3 :  23 August 2013 - Bullish Harami Spotted;  Will this reverse the trend?

After several days of down trend with DOW losing about 6% or 800 points,  a bullish harami candlestick is finally spotted.  Yesterday,  Germany announced better than expected manufacturing  PMI figure of 52 whereas US had bad economy figures with retail sale and jobless claims below expectation.  The investors cheered and started the buying spree with US investors hoping that QE will not be tapered.  But will this bullishness continue in the US and for how long?

The following chart will show that DOW has been oversold with the stochastic showing signs of recovery. A Harami candlestick is spotted but this one is not as strong as those having a much smaller body in the second day. 

As this dip is much worst that the previous ones and the Harami spotted is not very strong; also unlike the previous occasions,  the US 10 year yield is at 52 weeks high,  it is advisable to wait till the MACD histogram to hit positive before entering the market as shown in the chart.

1 comment:

Lance Tankmen said...

I just got some awesome hanging candle lanterns, im gonna put them in my garden.