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Bearish ‘hanging man’ pattern warns don’t buy the dip in the Dow transports

Candlestick reversal pattern suggests index’s trend has reversed lower

FactSet

Hanging

The sharp selloff in the Dow Jones Transportation Average on Tuesday completed a bearish “hanging man” pattern, which warns investors against trying to buy the dip.

When a “hanging man” appears after an extended rally, it is viewed by candlestick chart watchers as a trend reversal signal. For the Dow transports DJT, +0.18% the pattern appeared on Monday, after the index ran up 7.6% in two weeks.

Although the index closed up 0.1% on Monday, the sharp intraday selloff—it was down 0.9% at its intraday low—is reason to worry. “Generally the large [intraday] selloff is seen as an early indication that the bulls (buyers) are losing control and demand for the asset is waning,” according to the Market Technicians Association.

FactSet

A classic ‘hanging man’ pattern in candlestick charts

There are four features of a bearish “hanging man” pattern, according to Candlecharts.com:

A very little or no “upper shadow,” which in candlestick chart parlance in this case means the close (8,260.93 on Monday) is very close to or at the intraday high (8,262.36).

A relatively small body, meaning the opening (8,254.31) and closing prices are relatively close together.

A relatively long lower shadow, meaning there is a big spread between the intraday low (8,181.67) and opening price.

A lower close the following session (Tuesday), ideally below the body of the hanging man. The Dow transports slumped 2.2% on Tuesday to 8,077.74, to complete the bearish pattern.

One downside level in the Dow transports that technicians may be targeting is 7,886, which represents the 61.8% Fibonacci retracement of the rally off the Sept. 29 intraday low of 7,640.88 to the Oct. 9 intraday high of 8,281.80. If that level gives, some chart watchers would anticipate a full retracement to test the Sept. 29 low.

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