Outside days are days where a security’s price is more volatile than the previous day as evidenced by higher highs and lower lows in both the range and closing values. The term is commonly used among market technicians and day traders using candlestick charts to predict future price movements.
Outside days are a two-bar candlestick pattern that occurs when the current day’s candle has a higher high and a lower low than the prior candle and also a higher closing high and lower closing low. Unlike bullish or bearish engulfings, outside days look at an entire candlestick – including both the shadow range and the body.
An outside day shows that volatility is on the rise. The longer body shows greater conviction for the open and closing prices with a more emphatic signal for the future direction of the security. The longer shadows indicate a broader range of interest in the marketplace. These factors should be considered in the overall context of what’s happening with a security’s price to predict where prices may be headed.
Outside days often serve as part of a continuation pattern in the direction of the latest candlestick. For example, a bullish outside day occurring during an uptrend is a signal that the uptrend is expected to continue. However, outside days can also act as reversal patterns depending on the context. An outside reversal will include an outside day pattern in the opposite direction of the security’s price trend. Traders will typically use outside days along with other technical indicators or chart patterns, such as the Relative Strength Index (RSI), moving average convergence divergence (MACD) indicators, or ascending or descending triangles.
The first example (below) is an outside day in the S&P 500 SPDR (SPY). Since the candlestick’s body engulfed the prior day with a red candlestick, the pattern was also a bearish engulfing, which suggests downside ahead. One point to note here is that the volume was relatively light, which means that the pattern had a relatively weak signal for traders. The subsequent increase in price shows why it’s important to look at other technical indicators when using outside days.
The second example (below) shows a bullish outside day pattern in Alphabet Inc. (GOOGL). In this case, the outside day (and bullish engulfing) had a long candle body providing a strong bullish signal. Shares of the stock rose significantly over the ensuing couple of days which also point to the outside day as an outside reversal.