Investing.com UK - Financial Markets Worldwide

Historically, How Bearish Has A 'Bearish Outside Week' Been On The ASX 200?

ByCity Index
AuthorMatt Simpson
Published 25/11/2019, 06:19
AXJO
-
S&P ASX 200 Weekly Chart

By Friday’s close, the ASX 200 had produced a bearish outside week after failing to hold above 6,800 which raises the potential for some mean reversion. Given the slight bearish divergence forming with RSI and the clear loss of momentum leading it back towards its all-time high, we explore the bearish potential of this classic candlestick pattern to see if it can pull the run from under Santa’s rally in December.

The test: Using Reuters data since April 2000, we filtered all bearish outside candles on the weekly chart. We have then calculated forward returns following a bearish outside candle, along with the % of bullish closes of the forward returns.

As we’re testing a bearish pattern, ideally we’d want to see negative returns with a % bullish rate below 50%.

S&P/ASX 200 Forward Returns

  • The week following a bearish outside candle tends to close higher more often than not and median returns are also positive, whilst average returns are negative (currently the ASX200 is trading higher this week but we’ll see how this plays out).

  • From this data set, 2 weeks after a bearish outside week has produced the most bearish returns on average, with the highest success rate (as they only close higher on 43.4% of the times). Also note that median returns are also negative suggesting the results are more consistent.

  • Whilst average returns are negative between 1-6 weeks after the pattern, median returns (or typical returns) are positive and close higher over 50% of the time. This suggests a few outliers have pushed average returns into negative territory, yet they typically close higher more often than not.

    • However, as this filters all bearish outside candles, trend direction has not been considered. So next we apply a rule where the pattern must close above or below its 10-week average to denote a basic trend filter.

    S&P/ASX 200 Forward Returns Close Above MA10

    Bearish outside day with a close above its 10-week MA

  • In short, not very bearish at all.

  • Average and median returns are positive between 1 to 6 weeks later, and all have a positive expectancy with % bullish above zero.

  • It’s interesting to note that median returns accelerate 5-6 weeks later

  • The week after the pattern (or this week) has a % bullish rate of 75%!

  • However, there are only 27 instances of this occurring since 2000 (generally its good practice to have a minimum of 30 occurrences).
    • ASX200 Bearish Outside Below MA10

    Bearish outside day with a close below its 10-week MA

  • That’s a bit more like it…

  • Again we see +2 weeks as optimal to bears, as both average and median returns are bearish. Moreover, bullish closes are just 24% which means it has closed lower 76% of the time.

  • The relationship breaks down around 4 weeks later as median returns are positive over 50% of the time.

  • Ultimately, it has been better at picking near-term reversals over longer-term ones.

  • However, there are only 25 instances of this occurring since 2000 which is below the ideal sample of 30 or above.
    • ASX 200 Average Returns

    Final thoughts:

  • Two weeks after a bearish engulfing candle appears optimum for bears, unless it has closed above its 10-week MA. (take note, the ASX200 closed above its 10-week MA last week).

  • With average, median and % of bullish closes all positive up to 6 weeks after the pattern, it appears to be more of a bear-trap signal if anything.

  • Moreover, December has historically been the most bullish month of the year for the ASX200. Average returns are over 2% over the past 30 years, and it has also posted positive average returns over 50% of the time over the past 30, 15, 10 and 5 years.

  • Given its tendency to rally in December and post positive returns if a bearish engulfing candle closes above its 10-week average, the ASX200 could still rally over the next few weeks.

    • Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

    Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

    Original Post

    Latest comments

    Loading next article…
    Install Our App
    Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
    Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
    Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
    It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
    Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
    © 2007-2025 - Fusion Media Limited. All Rights Reserved.