The Last Bearish Engulfing Pattern for Olam

18 December 2012

Introduction

After having created a false breakdown, Olam’s stock price continued to slide about 7% from SGD$1.50 on 6 Dec to SGD$1.39 on 17 Dec. A reversal pattern called “Last Bearish Engulfing” pattern was spotted yesterday and the reversal was confirmed today.

What is “Last Bearish Engulfing” Pattern ?

Engulfing patterns are reversal patterns. Normal Bearish Engulfing patterns will only occur at the top of a trend and Bullish Engulfing pattern, at the bottom.  The various different engulfing patterns and their trigger and failing conditions are as shown:-

However, when buyers and sellers were caught trading in the wrong direction,  they form "Last Engulfing" patterns; for example, the “panicked” sellers are selling their last stock position yesterday and thus creating a Bearish Engulfing patterns. It is true also when “hopeful” buyers are buying once more at the top, thus forming a Bullish Engulfing patterns at the top. Experienced traders will take the opportunity to either buy up the stock at the bottom or sell down the stock at the top when they see the occurrence of any “Last Engulfing Patterns (LEP)”.

However, LEPs are not exactly reversal patterns. Some chartists, after some countings, were of the views that LEPs are actually continuation patterns for 65% of the time. Unlike the normal Engulfing patterns, some traders were confused. They short or buy the stocks at the wrong time for a wrong price; as a result, there were no concerted effort to push the stock very far. Like the normal Engulfing patterns, LEPs will need confirmation candlestick to determine the direction.

Trading Recommendation

Because LEPs are not real engulfing patterns, it is likely for Olam to go as far as testing the major resistance line shown red in the attached. It is therefore not recommended to enter the market, not until the price has crossed above the major resistance line with +DI also crossing above –DI, which are signs for a full recovery.

Update 1:  28 December 2012  Last Bullish Engulfing Pattern

After having created a Last Bearish Engulfing pattern on 17 Dec,  Olam's price rose about 10% from 1.39 to 1.56 in a week.  Today,  it formed a Last Bullish Engulfing pattern at the top as shown.

The textbooks are mixed about this Last Bullish Engulfing pattern.  Some said this pattern will break up most of the time;  others said that this is a bearish reversal pattern that will break down eventually as shown in this chart.

Usually when rights issue is being issued, the stock price will fall due to price dilution on ex-Rights day.  However,  Olam's price  did not drop as if it was being supported due to prolonged down trend.  Last Bullish Engulfing pattern will need confirmation to determine the direction.

Update2:  7 Jan 2013 Last Bullish Engulfing with Bearish Harami

After having formed the Last Bullish Engulfing candlestick on 28 December,  Olam's price rose about 10% and formed a Bearish Harami on 4 Jan 2013.  It is as if the investor knew the price would fall as Temasek would not buy as it took up the remaining Rights issues.   The Bearish Harami reversal pattern will be confirmed if today is a down day and Olam's price will continue to fall and may go even lower than the last low.

Disclaimer:   Please verify the information if they are to be used for trading purposes