- The stock must be in a clear uptrend.
- Day one is a long body candle. It's not required, but the pattern works best if it is a white body candle, not a red.
- Increased volume should confirm the long body candle.
- Day two is a short body candle. The color of the candle is opposite the color of Day one. (Ideally, this is a red candle.)
- The body of day two's candle must be completely inside the body of day one's candle. Either the top or bottom of the day two body may be equal to day one's, however not both. The second candle must be shorter than the first.
American Airlines Group (Nasdaq: AAL) completed a classic Bearish Harami pattern today (8 December 2016). All five of the requirements are present.
|AAL Daily Chart|
Beginning with the 52-week low on 27 June 2016, AAL appears to have completed Wave 3 of the 5-wave Elliott Wave impulse. Since the next wave is a corrective wave 4, this adds another measure of support to the validity of the Harami. Since Wave 2 was a flat and long corrective wave, the alternation rule states that Wave 4 will likely be short and steep. Several possible targets glare out at us from the chart:
- A 23.6% retracement to the 43.50 range is the first obvious point. There's support at that level, too, extending out to the 21 March 2016 high. This level coincides with the 38.2% retracement level of Wave 3, so the evidence is lining up nicely to support this retracement level.
- A 38.2% retracement to the 40.00 range is another possible point. The line of support at that level is much greater and extends across the entire chart. There's a prior congestion point at that level, and it also leaves us just above the high of Wave 2. This would be an extremely deep corrective wave, however, and requires breaking through several prior support lines to reach this deep. This level coincides with the 61.8% retracement level of Wave 3, so it's certainly within the realm of the practical, so let's not discount the possibility.
Based on our analysis, we will not be looking for a long entry in AAL until Wave 4 completes and we see evidence of a return to the upside. As strong as the overall market has been, however, we'd prefer to play AAL to the short side in conjunction with a pullback in the broad market. We'll be looking for weakness in the Dow and NASDAQ futures before the open and will only enter short if the broader market is also in decline after the 9:50 EST time frame. (Again, we prefer to avoid the volatility associated with the open since our holding period is a few days, not hours.)
Finally, exercise caution as the stock approaches the diagonal support line marked in green. Based on the number of touches and the way it held just prior to the Harami, that could turn out to be a significant support level. Don't dismiss it.