Investors look for ways to classify stocks. Because so much of stock technical analysis is based on comparison, it is important to find common ground. The best and most widely accepted form of association is stock sectors. “Stock sectors” is a qualification method which looks at the type of business and groups them based on generally accepted names. One of the most common classifications breaks the market down into eleven different stock sectors. Two are generally regarded as “defensive” and the other nine are referred to as “cyclical”. For successful traders, it is important to understand the differences between both these categories and the stock sectors they include.

Defensive Stocks
Utilities and consumer staples are referred to as defensive stocks. Companies in these sectors usually don’t suffer as much when the market experiences problems because people don’t stop using energy or eating. They are frequently used portfolio diversification and offer protection in a falling market.

However, the downside of the dampening effect of defensive stocks is that they usually fail to climb with a rising market. Just because the market is doing well, people don’t necessarily use significantly more energy or eat more food. Defensive stocks sectors do exactly what their name implies, assuming they are well run companies. These two stock sectors can be used as a basis of hedge fund investing - dependable, steadily moving stocks that prevent too much stock volatility in a portfolio.

Cyclical Stocks
Cyclical stocks are the other nine stock sectors. These stocks cover the remaining sectors and they typically move according to a variety of market conditions. They do move independently, however, as one may be going up while another is going down. Because of this, purchasing from the cyclical stock sectors requires your best stock market investing strategy. The nine cyclical stock sectors are:

• Basic Materials
• Capital Goods
• Communication
• Consumer Cyclical
• Energy
• Financial
• Health Care
• Technology
• Transportation

Most of these stock sectors are easily understood. They include companies and products that are readily identifiable. Investors call them cyclical because they tend to move up and down in relation to businesses cycles or other influences.

Basic materials, for example, include those things used to make other goods – lumber, for instance. When the housing market is active, the stock of lumber companies will tend to rise. However, high interest rates might put a damper on home building and reduce the demand for lumber. These items define the stock market; traders look to buy from cyclical stock sectors when prices are low and sell when prices are high. In a nutshell, the cyclical stock sectors are the stock market!

How to Use the Information
Like our title, successful trading requires putting the stock market in the right baskets. Technical analysis actually starts with knowing from what kind of stock sector a business originates. By knowing the origins of a business, an investor can know how to evaluate its stock. Most analysis matrices start by comparing businesses from the same sector. As you use your stock trading plan, you will incorporate more technical analysis tools into your decision making process. Then you’ll be able to see why putting the market (your eggs) in the right baskets is a good thing!

Each individual candlestick signal portrays the investor sentiment of that specific timeframe. That information alone is very valuable. Incorporating that information with previous formations produces a better analytical visual evaluation. Add other supporting technical indicators to that evaluation, such as stochastics and moving averages, makes trends analysis much more clear.

When the evaluation of what a price trend should be doing is more evident to an investor, the possibility of being scared out of a position is less likely. Knowing what a trend is doing or is about to do creates a much better format for deciding when to stay in a position or close out a position. What type of price action has occurred in the current trend? Is there a specific formation that can be identified?

As illustrated in the Dow chart over the past week or so, the trading has had a reoccurring pattern. The selling occurs early in the day, followed by the buying going into the close. What can be assumed by that trading pattern? The profit taking occurs early in the day with the buying finishing up the day. Knowing this pattern is in effect, as witnessed by the shadows at the lower ends of the daily formations, it should be assumed that the bulls are still in control. This makes short-term trading more comfortable with the realization that the Bulls keep stepping in.

DOW

This also makes the analysis of the longer-term trend prognosis easy-to-understand. Is the trend is near a top?

If one of the telltale features of a potential top is the exuberant buying, then this market is not showing any signs of exuberance. Profit taking, occurring almost on a daily basis, indicates the lack of massive profit taking potential. The uptrend should continue unless something severe changes investor sentiment.

Is there any doubt or nervousness in the current investor sentiment? Not when the recognized names are being bought without any hesitation. AAPL is a perfect example of candlestick signals revealing what investor sentiment was doing.  Apple Computer is an industry leading name. The Belthold Signal in late December revealed the selling had stopped and a high probability of a new uptrend starting. A Belthold Signal, followed by a gap up, not only revealed that the selling had stopped but  the buyers wanted back into this position with enthusiasm. Will all candlestick reversal signals produce 25% returns in two weeks? When we recommended this position after the Belthold Signal, it was with the probabilities that the price would move higher from that signal. Did we know what was about to be announced a week later? Definitely not, but the signals told us that somebody started buying this stock. Candlesticks signals utilize the information that other investors have. A candlestick buy signal does not tell you why investors are buying; they just indicate that investors are buying.

AAPL

Will you make 25% on a stock trade or 550% on every option trade? No, but the candlestick signals allow an investor to identify where the probabilities of being in that type of trade are dramatically improved. Utilizing the signals properly provides a format for technical traders to take advantage of immediate price moves as well as alerting the fundamental investor of a possible shift of circumstances in a company's future. Click here for more candlestick analysis training information.

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Good investing,

The Candlestick Forum Staff