FuelCell Energy, Inc (NASDAQ:FCEL) was trading more than 9% lower on Thursday, despite printing a bullish Marubozu candlestick on Wednesday, which suggested the stock should trade higher.
The big move in the general markets on Wednesday, caused by a bullish reaction to the Federal Reserve’s decision to raise interest rates by .5bps to combat soaring inflation, may have been a bull trap.
On Thursday, the S&P 500 opened lower and by press time had declined about 3.3%, pressuring individual securities to the downside. FuelCell didn’t fall below Thursday’s low-of-day, however, which has caused the stock to print an inside bar on the daily chart.
An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the current 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 FuelCell Chart: FuelCell’s inside bar leans bullish because the stock was trading higher in an uptrend before forming the pattern. FuelCell’s most recent higher low was printed May 2 at the $4.02 level and the most recent higher high was formed at $4.77 on Wednesday.
- The inside bar was being created on lower-than-average volume, which is typical of the pattern and validates that consolidation is taking place. At press time, about 400 million FuelCell shares had been exchanged had compared to the 10-day average of 11.96 million.
- Traders can watch for a break up or down from Wednesday’s mother bar to take place on higher-than-average volume later on Thursday or on Friday, to confirm whether the pattern was recognized.
- On Thursday, FuelCell was testing the eight-day exponential moving average (EMA) as support and holding above the level. Bullish traders will want to see this continue and then for big bullish volume to come in and break FuelCell up from the inside bar, which could provide the stock the power need to regain the 21-day EMA as support.
- Bearish traders want to see FuelCell lose support at the eight-day EMA and break down from the mother bar, which could cause the stock to fall below the most recent higher low and negate the uptrend.
- FuelCell has resistance above at $4.52 and $5.77 and support below at $3.36 and $1.69.
