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Red gaps vs. green gaps, a candlestick with prolonged upper shadow vs. breakout.
Who will win, and who will lose this tussle in the key area?
Looking at the daily chart, we can sum it up with a simple statement: the moment of truth. What is in favor of the bulls, and what is in favor of the bears? I invite you to read today's article, in which you will learn more about the current technical situation and potential scenarios for the next few days.
In the last commentary on Hess Corp. published on Jan.10 you could read the following:
(…) the last week’s candle has a prolonged upper shadow, which means that the sellers created a shooting star formation, which occurs after an upward move and indicates that the price could start falling – just like it happened.
(…) we saw a similar candle in mid-Oct. Back then, it preceded a bigger decline, which suggests that the bears may not remain indifferent to its appearance and could re-enter the market decisively in the coming week(s).
Additionally, the week started with the mentioned red gap, which in combination with the sell signal generated by the Stochastic Oscillator increases the probability of further decline and (at least) a test of the nearest important support zone.
Looking at the weekly chart, we can see that the situation developed in line with the above scenario, and the stocks moved lower in the following weeks.
As you see on the weekly chart, the sellers took advantage of pro-declining technical factors and attacked the following week, creating another red price gap (140.40-141.77) on the chart. Thanks to this drop, stocks also slipped under the previously broken 50-week moving average, which, in combination with the mentioned gap and sell signals generated by the Stochastic Oscillator, encouraged bears to trigger further deterioration.
What impact did it have on the daily chart?
Before we check the answer to this question, let's recall the technical situation in the short term from the time of the last comment:
(…) What’s next?
Taking into account Monday’s gap, earlier bulls’ weakness, pro-declining dark cloud cover pattern (which reinforces the major short-term resistance zone based on the 50% Fibonacci retracement and the gap from Oct.27, 2023) and the sell signals generated by the daily indicators, it seems more likely than not that further deterioration is just around the corner.
How low could stocks go in the coming days?
In my opinion, the next downside target for the sellers will be the 61.8% Fibonacci retracement (based on the Dec.-Jan. upward move), which corresponds to the upper border of the green supportive gap (136.31-138.19) formed on Dec.14, 2023.
From today’s point of view, we see that the situation developed in accordance with the previous pro-declining scenario, and the sellers registered in the designated target area in the previous week.
However, before they reached this zone, they created 2 red gaps: the previously mentioned red gap (140.40-141.77) from Jan.16 and last week’s gap (136.97-138.29) from Jan.17.
Despite this deterioration, the lower border of the green gap withstood the selling pressure, and three attempts to close it failed, which is the first positive sign that suggests the decline may be coming to an end.
Additionally, when taking a look at the daily chart from a slightly different perspective, we can see that this support area is also reinforced by the 78.6% Fibonacci retracement based on the entire Dec.-Jan. upward move, which increases the likelihood of pausing or even stopping further declines.
Where did this assumption come from?
In addition to the fact that the mentioned support zone has not yet yielded despite several sellers’ attacks, we must bear in mind the fact that during Monday's session, the upper border of the red declining trend channel (marked on the upper daily chart) was broken.
This is a positive sign, which suggests that the short-term trend could change in the very near future – especially when we factor in buy signals generated by the daily indicators and positive divergences between the weekly indicators (the CCI and the Stochastic Oscillator) and the price.
Additionally, the volume, which accompanied last week’s decline, was smaller than a week earlier (marked on the weekly chart), which suggests a smaller involvement of the sellers in shaping the red candle, which may translate into reduced pressure during the upcoming sessions.
Is there anything else positive that bulls can use to their advantage?
Yes. Yesterday’s pullback could be a verification of Monday’s breakout above the upper line of the short-term red declining trend channel. If this is indeed the case and the bulls maintain their position, we should see an improvement in their situation on the daily chart quite quickly.
On top of that, there is also an orange consolidation on the lower daily chart, which suggests that the bulls can gather strength before attacking higher levels and nearest resistances.
And speaking of resistance, please keep in mind that the price is still below the upper border of the red gap created on Jan.17, which means that the buyers will only be able to think about higher levels when it closes. If they manage to do this, the way to the next gap will be open.
Nevertheless, looking at yesterday’s price action, we see that an attempt to close it failed, leaving behind a candle with an elongated upper shadow. Yes, that's right - this shows the increased vigilance and mobilization of the bears in defense of their ally.
What might happen if the bulls fail in this area?
Firstly, we will definitely see another test of the lower border of the green supportive gap and the 78.6% Fibonacci retracement. At this point, it is worth keeping in mind that this is the key short-term support, which is part of a pro-bullish formation (an island reversal candlestick pattern). Therefore, it is crucial for the further fate of the bulls on the trading floor. Why? Because its potential closure may lead to a test of the next green support zone (based on Dec.11-Dec.13, 2023 lows) or even mid-Dec. lows.
Therefore, in my opinion, carefully observing the behavior of a market participant during the next session(s) may provide very valuable clues as to which direction the next bigger move will take.
Summing up, despite the declines in recent weeks and the formation of two red price gaps, the bulls fiercely defend their most valuable ally. Despite three attempts to close the green gap, the buyers do not give up, and, taking advantage of its presence, they mobilized themselves enough to break above the upper border of the short-term red declining trend channel. This means (in combination with other positive signals) that a trend reversal may be just around the corner.
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