Bed Bath & Beyond, Inc (NASDAQ:BBBY) was surging higher on Friday after breaking up from a triple inside bar pattern intraday.
The inside bar pattern is part of a consolidation phase that was needed after the stock skyrocketed 193% between July 27 and Aug. 8 after being targeted as a short-squeeze candidate. The short squeeze may not be done yet, and the bulls are in clear control of the stock.
An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the trend.
An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an "inside bar."
A double, or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.
Bullish traders will want to search for inside bar patterns on stocks that are in an uptrend. Some traders may take a position during the inside bar prior to the break, while other aggressive traders will take a position after the break of the pattern.
For bearish traders, finding an inside bar pattern on a stock that's in a downtrend will be key. Like bullish traders, bears have two options of where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.
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The Bed Bath & Beyond Chart: Bed Bath & Beyond’s triple inside bar leaned bullish because the stock was trading higher before forming the pattern. The break came on higher-than-average volume, which indicated the pattern was recognized and helped the stock receive bullish momentum.
The sharp move higher caused Bed Bath & Beyond’s relative strength index (RSI) to shoot back toward the 77% level, which indicates another retracement to the downside is likely in the cards over the coming trading days. When a stock’s RSI reached or exceeds the 70% level, it becomes overbought, which can be a sell signal for technical traders.
If Bed Bath & Beyond surges further, to surpass the Aug. 8 high-of-day and reach the 200-day simple moving average (SMA), the stock is likely to consolidate under the 200-day SMA for a period of time. The 200-day SMA acts as both heavy support and heavy resistance, making it unlikely a stock will break up or down from the level on the first attempt.
Bullish traders want to see Bed Bath & Beyond reach the 200-day and then consolidate under it for a period of time to drop the RSI back down to a comfortable level. Traders would then like to see the bulls take control and drive the stock up above the 200-day, which would throw Bed Bath & Beyond into a possible new bull cycle.
Bearish traders want to see the bulls become exhausted and begin selling their positions, which could drop the stock down below the eight-day exponential moving average. If the stock loses that level, a downtrend could be on the horizon.
Bed Bath & Beyond has resistance above at $13.13 and $15.38 and support below at $12.39 and $11.45.
