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Outside Day Pattern

Stocks finished Thursday down, ending four-day winning streaks for U.S. stock market indexes. The CPI report released in the morning showed inflationary pressures continue. Equity investors locked in trading profits and fixed income sold as Treasury yields climbed soon after the release of the CPI data. CPI rose 3.7% in September from a year earlier, or higher than forecast. The monthly gain was higher than expected, with CPI up 0.4% from August. Also, initial jobless claims came in flat at 209,000 or below the street consensus forecasts.


Major U.S. stock indexes were down from 0.37% to 1.91%, with NDX (-0.37%) and OEX (-0.40%) the relative outperformers and MID (-1.91%) and SML (-1.91%) the underperformers. Yields also moved sharply higher, as the 30-year yield (TYX) jumped to 4.685%, the 10-year yield (TNX) soared to 4.712%, and the 5-year yield (FVX) settled at 4.701%.

Technically speaking, an outside day appeared on SPX, NDX, and COMPQ. An outside day occurs when today’s daily price action has a higher high and a lower low than the prior day.


Is an outside day bullish or bearish?


An outside day can lead to a short-term trend reversal. The sharp price swing relative to the previous trading days can be helpful for traders, as an outside day can lead to a bullish or bearish tone.


The closing price helps to determine the next directional trend. If the day closes near the upper end of the daily trading range, it is a positive outside day (bullish). If it closes near the bottom of the day’s trading range, it is a negative outside (bearish).


SPX, NDX, and COMPQ closed near the middle of their daily trading ranges. The closes are neither bullish nor bearish but neutral.


The S&P 500 Index (SPX) has become increasingly volatile, as evidenced by the six (6) negative outside days, two (2) gap-downs, one (1) positive outside day, and a neutral outside day (10/12/23).


The wide intra-day market swings suggest investors are confused about what the Federal Reserve will do in the next FOMC meeting.


Typically, after the onset of an outside day, the subsequent trading days will help decide the next short-term directional trend.


SPX nears crucial resistance at 4,376-4,412 (9/21/23 gap-down, 50-day ma, and the 50% retracement from the 7/27 to 10/3/23 decline). Above this extends the SPX recovery toward secondary resistance at 4,448.5-4,470 (Jun 2023 highs and left shoulders, 61.8% retracement from the 7/27 to 10/3/23 decline, 9/20/23 negative outside day high, and top of the Jun 2023 downtrend channel). A breakout hints at a retest of the right shoulder (4,541.25 – 9/1/23 high) and the 8/2/23 gap-down (4,551-4,567.5). The 7/27/23 reaction high or the head at 4,607.07 remains pivotal intermediate-term resistance. The ability to clear this resistance signals the resumption of the primary uptrend, leading to a retest of the Jan 2022 all-time highs.


The next few days are critical, as failure to break the above resistances warns of the continuation of the Jul 2023 downtrend channel (4,186 and 4,470). Key support is 4,181-4,218.5 (200-day ma, 10/3/23 low, May 2023 breakout, 50% retracement from 3/13/2 to 7/27/23 rally, bottom of Jul 2023 downtrend channel, and the 38.2% retracement from 10/13/22 to 7/27/23 rally). Violation warns of the start of a deeper correction (10%-plus decline) toward 4,099-4,114 (5/12/23 and 5/24/23 lows and the 61.8% retracement from the 3/13/23 to 7/2723 rally) and below 4,048-4,049 (Apr/May 2023 lows, 50% retracement from 10/13/22 to 7/27/23 rally, and Jun 2023 head/shoulders top breakdown target), and 3,902-3,918 (61.8% retracement from 10/13/22 to 7/27/23 rally and the Jul 2023 channel breakdown target).


Source: Chart courtesy of StockCharts.com

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