Why Monday's 'bearish engulfing pattern' might not be so bearish
The
S&P 500 Index (SPX) just did something so rare it's happened only 13 other times in history. Specifically, the index yesterday not only made a bearish engulfing pattern, but also hit an
all-time high. Below, we'll take a look at how the S&P tends to perform after this unique double occurrence.
A bearish engulfing pattern happens when the index "engulfs" the previous day's candle. Specifically, it happens when the index:
- Moves higher from open to close on Day 1, and
- Moves lower from open to close on Day 2, and
- The Day 2 open price is higher than the Day 1 closing price, and
- The Day 2 closing price is lower than the Day 1 open price
Below are the previous times the SPX made a bearish engulfing pattern, regardless of whether it was at or near an all-time high. There have been 208 of these instances, according to Schaeffer's Senior Quantitative Analyst Rocky White. As you can see by the post-signal returns, it's called a "bearish engulfing pattern" for a reason, as the SPX tends to underperform compared to its anytime returns, looking at data since 1984.
Narrowing that, below are the last times the SPX made a bearish engulfing pattern
and hit an all-time high in the same day. The last time this happened was in late November 2016. Prior to that, you'd have to go back to April 2015, which was the first signal in almost two years. The first time the SPX made the bearish pattern and touched a record was in March 1993. In fact, I found it interesting that seven of the 13 signals happened in the months of March or April, though four of those were in 1995.
When these instances occur in tandem, the S&P has actually outperformed over the next three months. Specifically, the SPX was up an average of 4.02% after a signal -- about twice its average anytime three-month return of 2.06%, looking at data since 1993. One day after a signal, though -- which would be today -- the index was 0.5% lower, on average, compared to an anytime gain. So far, though, stocks seem to be bucking that trend, with the
S&P moving higher out of the gate this morning.
