|WMS Industries (WMS) completed a bullish engulfing pattern on August 26, the engulfing pattern being a major reversal pattern. The bulllish variety occurs following a down move and requires a white real body to engulf the prior session's black real body. WMS satisfied these criteria on August 26 with an opening below the prior day's close and then enjoying a strong rally through the day to close above the prior session's high.|
|Figure 1: Daily chart of WMS.|
|Graphic provided by: Stockcharts.com.|
|Enhancing the likelihood that the WMS bullish engulfing will mark a turning point are three factors. First, the market has experienced a sharp move lower in the last month and is vulnerable to a correction. This is exemplified by the daily RSI, which is poised to move up through the 30 line - a level acknowledged by many traders that the trend in the oscillator has turned up. Second, there is a high volume session on the second real body of the engulfing pattern. This was the highest volume session since June 20, 2003, vindicating the pattern. Third, the ADX appears to be peaking after levelling out above the 40 level, which often signals trend exhaustion.|
|A successful bounce from the bullish engulfing pattern would target the 25.00 region that includes the 200-day EMA, which often acts as a magnet during retracements, and also the former swing low from June 22 at 25.35 that now evolves into support.|
|The bullish engulfing pattern can also be employed as a support level. The low of the two candlestick shadows becomes support. In the case of WMS, the August 26 low at 19.36 marks support and a close beneath that level would negate the bullish pattern and result in a resumption of the downtrend. |
The reliability of the bullish engulfing pattern when used in conjunction with other indicators almost removes the need to "ask yourself one question . . . Do I feel lucky? Well, do ya punk?"
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