SP500 produces a very rare bearish candle pattern.

 Afternoon Update.

SP500 is currently trading back up at 1177 in the wake of a Medley report which suggests that QE2 will be 'very material' as it expects FOMC to vote in Nov to buy $500b Treasuries over 3-6 months but  to give an open-ended commitment to buy more over the following 12-18 mos depending on economic conditions. The report reportedly says that QE2 in this way could be bigger than the market expects and last longer.

With a lack of follow through on the downside, It would appear the signal discussed below may be invalid. Tonight's close should be watched closely, a close above yesterday's high could be very bullish. Quick note on the EURUSD this may be forming a Failed Head + Shoulder breakout, which suggests we could revisit 1.4100 pretty quickly. 
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Early morning post

The price action on the SP500 has produced a very rare bearish pattern known as a 'Separating Lines'. This sees a strong light-bodied candle on day 1, and a strong dark-bodied candle on day 2, both opening at or very close to the same level. The chart below shows this, with an illustration and description of the 'Separating Pattern' below that.

 

As I have said these are very rare patterns, and typically there is further bearish follow through. As with all patterns there are no guarantees, and any sustained move over the open/high of yesterday may suggests a pattern failure, this of course makes this a relatively cheap risk/reward shorting opportunity. 

Further to this, I have looked back over the period since 2000 to see how often these patterns have appeared. I have included 'Kicking' patterns too, as these are the bigger brother of 'Separating Lines', the main difference is that 'Kicking' patterns have a gap between the two days opening levels. There have only been two prior examples of these types of formations since 2000, occurring in 2000 and 2001. I have shown zoomed-in charts of both of these below (with an illustration of a 'Kicking' pattern.

 

Just to provide some balance, I would like to point out that the SP500 futures have remained within their rising short-term trend channel. I have highlighted this on the the chart below, which shows the SP500 e-minis on a 4-hourly basis. Though the accelerated move in the wake of the NFP number has been broken, the main channel is still intact. However any sustained break of yesterday's lows would support the view that a bigger bearish correction may be on the cards.   

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