What is an outside month reversal pattern? An outside month pattern is a reversal price pattern that often signals a potential change in the trend of a price chart. It is depicted on the charts by an engulfing type pattern. The security’s high and low prices for the month often exceed the high and low prices of the prior month’s trading range. An outside month is rare, but it is a simple pattern. It is easy to spot on the monthly charts.
A pattern such as this does not often occur, especially for major stock market indexes. When it does occur, this suggests a sudden and often long-lasting trend reversal has taken shape. An outside month is more meaningful and reliable after well-defined and prolonged uptrends or downtrends. It is unusual to witness a perfect positive outside month pattern where the security in question declines and closes the month at the monthly low. It is also rare to find a perfect positive outside month pattern where the security ends the month at the top of its monthly high.
If the above scenarios do not materialize then this does not necessarily mean the signal is weaker or should be dismissed. The technical analysis discipline is not an exact science, but rather an art form. It is subjective, imprecise, and often open to interpretation. However, the investment discipline applies social scientific study and analysis of financial markets, through charts and price action, to help forecast price trends. In the spirit of the technical analysis discipline, it is probably important to recognize this reversal pattern signals a change in the supply/demand equilibrium.
A positive outside month is typically bullish, and a negative outside month is bearish. There is also a third possibility - the security closes the month near the mid-point of its monthly trading range. This exact scenario has developed for many key U.S. market indexes such as the S&P 500 Index (SPX), the NYSE Composite Index (NYA), the Nasdaq Composite Index (COMPQ), the Nasdaq 100 Index (NDX), and others.
For instance, the SPX index ended the month (Sep 2020) closing at 3,363. This places the SPX near the mid-point of its September intra-month range of 3,209.45 and 3,588.1. The pattern is neither positive nor negative, in our opinion. Rather, this hint of an indecisive market environment in which the opposing parties, namely the buyers and sellers are deadlocked. When opposing parties do not exert enough influence to alter the prevailing trend of the marketplace then it comes to the point where additional time is needed to “break the deadlock.”
We suspect October will be a crucial month. The outcome of the technical actions next month can help to solidify the following market scenarios: (1) the resumption of the Mar 2020 bull rally; (2) solidifies a major market top; or (3) the continuation of a volatile and erratic trading condition into the U.S. Presidential Election. It is paramount for traders and investors to monitor September’s intra-month low and high as they represent technical support and resistance, at least from a near-to-medium term technical perspective.
Attached below are the pivotal intra-month ranges for U.S. market indexes during September:
SPX: Low = 3,209.5, High = 3,588, and Close = 3,363.00
NYA: Low = 12,228.97, High = 13,299.73, and Close = 12,701.88
COMPQ: Low = 10,519.49, High = 12,074.06, and Close = 11,167.51
NDX: Low = 10,677.85, High = 12,439.48, and Close = 11,418.06