Stock Investing Basics Made Easy With Candlestick Analysis
Stock investing basics can be better learned when applying Candlestick analysis. Candlestick analysis incorporates common sense investment applications into a graphic form. This common sense investment analysis makes stock investing basics very easy to understand and apply.
Many of the Japanese Candlestick signals have stock investing basics built into their formation. The psychology that forms the signals is information that can be applied to any trend reversal.
The current market conditions in the Dow can be better analyzed when you already know what creates reversals. For example, a Doji represents indecision. A series of Doji's represents a lot of indecision. From observing historic patterns, price movement can be better anticipated after a period of indecision.
Apply that knowledge to the current trading action of the Dow for the past week and a half. After a period of indecisive trading, usually a strong trend one way or the other will appear. As witnessed, the Dow has been up one day and down the next day for the past eight trading days. This indecisive trading has occurred at a major moving average. Twice in the last week and a half prices have formed a bullish Candlestick signal bouncing off a major moving average.
Although this indecisive trading area has been somewhat frustrating, it does reveal some information that the Candlestick investor can identify. Instead of throwing up ones hands and wondering what this market is going to do, the Candlestick investor can at least identify some valuable trading information that has occurred during this period.
Market Direction - When the 50 day moving average and the 200 day moving average do not seem to be close enough to the current trading to provide any meaningful targets, it becomes obvious to start looking for the next logical support/resistance level. As seen in the Dow chart, when the 200 day moving average was breached to the downside, the next target needed to be established.
The next logical target becomes the 500 day moving average. Last week, the 500 day moving average appeared to support prices. However, follow-through buying seemed to have disappeared through Thursday. At that point, prices closing more than halfway down the bullish candle that formed the Bullish Engulfing signal should have been an alert that the bears might be back in control.
The fact that the last bearish black candle closed right near the 500 day moving average provided another parameter for investment decisions. If prices broke down one more time through the 500 day moving average, and closed lower than the previous lows of last week, then that becomes an obvious sign the 500 day moving average was not going to act as support anymore. Prices could drop to the next potential support level, which may be the 1000 day moving average.
The formation of a Bullish Harami right at the 500 day moving average provides a different scenario. The Bullish Engulfing signal of last week and the Bullish Harami of Friday reveal two strong bullish signals at a major moving average when the stochastics were in the oversold condition and starting to move back up.
Although the last eight trading days have been schizophrenic, making the analysis of the market direction very difficult, the Candlestick signals provide a clear format for the Candlestick investor. The two strong bullish Candlestick signals can be identified. They were identified while supporting at the 500 day moving average. The stochastics were in an oversold condition.
As seen in our morning comments, it has been advised to use this type of trading environment to have long and short positions in the portfolio. That was suggested to protect one from being fully exposed in one direction or the other. Until the direction of the market is identified, there will be sectors that provide good short positions as well as other sectors that provide good long positions. Or for those that do not like to short, being heavier in cash is the right strategy.
This strategy will remain in effect if Monday shows another weak trading day. That would illustrate that there is still indecisiveness in the market. On the other hand, seeing a strong open on Monday would provide a different scenario. A second bullish signal, the Bullish Harami, bouncing once again off of the 500 day moving average and followed by a positive open, would reveal that the sellers are finally stepping out of the way and the next uptrend should be in progress.
A strong open on Monday would warrant adding more long positions to the portfolio and watching to make sure the short positions do not show any relative strength. This is as simple as stock investing basics can get. Analyze what the high probability Candlestick signals are revealing, even if they are appearing during an indecisive trading session.
The Moving Averages - The moving averages are important support and resistant level indicators. Each moving average acts as a magnet for prices. Most technical investment programs teach how to use the moving averages when they cross each other. As support and resistance levels, they can be used for a much better profit potential when applying Candlestick signals.