Friday 10th Jan 2020:
Almost all indices showed bearish signals at the close of the day despite opening the market at a higher price. S&P500 touched a record high of 3285.8 only to close at 3263.6 thus forming a dark cloud cover pattern and all happened during a buzzing Friday that witnessed a nonfarm payroll and unemployment rates day too.
So what does all this mean?
S&P500. Dark Cloud Cover. Jan 10th, 2020. -Trading View
According to the study of candlesticks charts, a dark cloud cover and a bearish engulfing pattern show an early warning sign that the market could turn around.
What is a Dark Cloud Cover?
Formation of the pattern: The Dark Cloud cover pattern as shown in the above chart happens in an uptrend. It gaps higher on the second day. It consists of a bullish candlestick followed by a bearish candlestick. It usually gaps higher on the second day only to sell-off towards the end of the day. It has to close below the previous candle's read body midpoint.
DAX Index. GERMANY30: Top 30 performing companies in Germany. 10th Jan 2020.
UK100. FTSE. Top 100 performing companies in the UK. 10th Jan 2020.
What is a Bearish Engulfing Pattern?
Formation of the pattern: You see them in an uptrend. The pattern consists of a bullish candle followed by a bearish candle. The real body of the second candle (filled/dark/red) almost covers "engulfs" its previous candle's real body signifying a strong reversal signal that the sellers are gearing to take over the buyers by pushing the price lower despite buyers trying their best to remain bullish. It shows the present psychology of the market or the asset class. Usually happens on a high volume day. An example of a bearish engulfing candle in the US30 charts on 10th Jan 2020 is shown below.
US30. Wall Street. 30 top-performing companies in the USA. 10th, Jan. 2020
It coincidentally (or maybe not) happened today, 10th Jan 2020, on a Friday which consists of Nonfarm Payroll & Unemployment Reports, usually, a high volatility day when the reports are in.
What is the Nonfarm Payroll Report?
Traders rely upon economic data to make decisions before placing trades. Nonfarm payroll is one of the most important monthly economic data as it gives a good indication of the growth of jobs in the United States.
How To Read the Report?
If the actual is higher than the forecast then its good news for the market and vice-versa.
Below is a free economic calendar from Forex Factory.
Economic Calendar. Forex Factory Jan 2020
The report usually comes out at 8:30 a.m. Eastern Time, USA, on the first Friday of every month ( except for holidays). It's a fairly large report so traders mainly lookout for the actual number compared to the expected number which is detrimental in moving the markets accordingly. The Bureau of Labor Statistics also revises the month prior to the previous, known as the two-month net revision.
Other data to consider are:
What is the Unemployment Rate Report?
The unemployment rate is another important data report. It is the percentage of the total labor force that is unemployed but actively seeking work. The figure moves in relatively small increments compared to the headline reading and movements as small as 0.2% in either direction can often be viewed as a large change.
Large fluctuations in wage inflation are often factored into the Federal Reserve’s decision-making, and the number of hours worked in the reporting period may also be monitored for changes or irregularities.
These are just a few factors to consider while trading the U.S. Non-Farm Payroll Report and it brings in a lot of trading opportunities during these events.
In a nutshell... two scenario's can happen when you see the above-mentioned reversal patterns :
Both- Dark Cloud Cover and Bearish Reversal patterns are strong reversal signals and I am looking forward to the charts next time.
P.S: I don't trade the news anymore but I used to. Do you trade nonfarm days?
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