Negative Outside Months
An outside month pattern is a reversal price pattern that often signals a change in the trend of a price chart. It is depicted on the charts by an engulfing type of pattern. The security’s high and low prices for the month exceed the high and low prices of the prior month’s trading range. The outside month may be a simple pattern, but it has significant implications when confirmed.
A pattern such as this does not often occur, especially for major stock market indexes. When confirmed, this suggests a change in the supply and demand equilibrium. An outside month pattern is more meaningful and dependable after well-defined and prolonged uptrends or downtrends. Sometimes, the security and index in question close at the exact high or low for the month. When this occurs, it is technically significant.
The technical analysis discipline is not an exact science. It is an art form subject to individual interpretations. Nonetheless, the investment discipline applies social scientific study and analysis of financial markets through charts and price actions to help forecast price trends. In the spirit of the discipline, positive or negative outside patterns are one of the more significant reversal patterns. Yearly reversal patterns are far more influential than monthly reversals. The monthly reversals override the weekly, and the weekly reversals trump the daily.
A positive outside month is typically bullish. A negative outside month is bearish. There is also a third possibility - the security closes the month near the middle of its monthly trading range. Under this scenario, the pattern is neutral as the buyers and sellers are dead-locked. When opposing parties do not exert enough influence to alter the prevailing trend, more time is needed to “break the deadlock.”
With two trading days left before the end of January 2022, another negative outside month has appeared in SPX and other indexes. If the pattern is confirmed, it will be the fifth negative outside months in the past 2-plus years. Negative outside months occurred during May 2019, Feb 2020, Sept 2020, and Sept 2021.
Is this another correction or something more?
Attached below are the January intra-month ranges for the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), NYSE Composite Index (NYA), S&P 400 Mid-cap Index (MID), and S&P 600 Small-cap Index (SML). Interestingly, the Nasdaq Composite Index (COMPQ) and the Nasdaq 100 Index (NDX) do not show negative outside months. Will decisive closes at or near the bottom of their intra-month lows lead to the next market sell-offs?
SPX: monthly low = 4,222.62 (1/24/22) and monthly high = 4,818.62 (1/4/22)
INDU: monthly low = 33,150.33 (1/24/22) and monthly high = 36,952.65 (1/5/22)
NYA: monthly low = 33,150.33 (1/24/22) and monthly high = 17,442.54 (1/13/22)
MID: monthly low = 2,519.16 (1/27/22) and monthly high = 2,877.35 (1/5/22)
SML: monthly low = 1,246.65 (1/27/22) and monthly high = 1,433.38 (1/5/22)
Also, enclosed is technical updates to the Monthly and Weekly SPX charts. Look for the confluence of technical levels as they will distinguish between weak/temporary and strong/formidable support and resistance levels.