On January 12, Steve Nison probably would have advised bulls to prepare for the SOX pullback that occurred over the next few days. That's when the SOX had produced eight record session highs.
Steve Nison has written at least two books on candlestick charting methods. Record session highs are sessions in which prices reach a higher high than the previous session high. Prices hitting a lower low than the previous candle's low produce a record session low. Many candlestick enthusiasts begin looking for other signs of a reversal or consolidation when prices have achieved eight to ten record session highs or lows, as this suggests that the trend may be extended. This candlestick pattern requires a longer time period to develop than do many others, but Nison calls it one of the most reliable.
The record-session concept was discussed earlier in the year in a series of articles on candlestick reversal patterns, but it's perhaps appropriate to return to the discussion after this month's action. Please note that charts were chosen to illustrate the pattern, and do not reflect current prices.
Annotated Daily Chart of the SOX:
In addition to producing eight record sessions, the SOX provided another confirmation that the trend might be changing or morphing into a consolidation period over the short term--that bearish engulfing candle produced the same day as the eighth record session. As this report is completed mid-morning on January 27, the SOX has broken out of a consolidation pattern to the upside, leaving behind another possible exhaustion gap. A trader with a long-term option or long SOX stocks could have benefited from that upside breakout, but a trader who had been holding a January call as that eighth record session high was produced was to see chop the rest of the way into the expiration of that position. Understanding what the record session highs were showing would have allowed a short-term trader to make reasonable decisions about holding onto that short-term position or closing it out.
The SOX's behavior was a near-perfect illustration of eight record session highs, but perfection doesn't always occur, of course.
Annotated Daily Chart of the TRAN:
The TRAN corrected sharply again after that eighth record session high, restarting the count again, and the index then climbed into a retest of December's high, where it sits mid-morning Friday as this report is prepared. Choppy or coiling sideways-up trading is of course one way to dissipate overbought pressures, but as of this writing, the TRAN has not yet begun a new trend.
The same theory works with record session lows.
Annotated Daily Chart of Dell:
Candlestick aficionados would have been warned to begin stepping out of short-term bearish positions or planning profit-protecting moves as Dell's eighth record session low was produced. Someone in a short-term bearish position would have been forewarned of the hard bounce coming that would reverse 50 percent of the drop from the December high. While a trader with a longer-term bearish position might have been able to benefit from Dell's eventual move back toward the November low, a trader holding a January put might have seen that position's value shrink considerably by the time Dell made it back to its pre-reversal level just before January option expiration. Those in longer-term bearish positions would have been forewarned to take profit-protecting measures or make decisions about exit points. Although not shown on the chart, Dell's eventual progress back toward the November low has been choppy, with such choppy movements sometimes chopping up premium on a short-term option's value, too.
Although eight to ten sessions usually proves helpful to watch, some securities tend to reverse after slightly fewer or slightly more record session highs or lows. With the SOX's habit of overrunning targets, its short-term reversal in mid-January after a classic eight sessions of record highs perhaps proves surprising.
Momentum stock GOOG produced an astonishing 15 record session highs before its first sharp but short-term correction as it moved off its October low.
Annotated Daily Chart of GOOG:
After the sharp correction, GOOG began a new count and produced another eleven record session highs before its late November sharp reversal. After that, another seven record session highs were recorded, followed eventually by a move of six record session highs. GOOG's pattern has since disintegrated with January's big moves.
GOOG may or may not eventually move higher again, too, after dissipating overbought pressures. That won't have mattered to the short-term bull heading into January option expiration. A bull who had watched GOOG's shortening pattern with respect to the number of record session highs that it was creating before a sharp pullback might have seen that deterioration coming.
Whatever the trading vehicle, whenever you see eight-to-ten record session highs
or lows in the stock or index you're trading, it's time to start planning,
especially if you're in a short-term option position.