Stock Market Recommendations Using Candlestick Signals
Being able to analyze markets that influence the stock market provides additional advantage for the Candlestick investor. Being able to evaluate whether the stock market is in an uptrend, a downtrend, or in a reversal period, greatly enhances the ability to maximize profits. The stock market recommendations become a function of knowing which direction a portfolio should be positioned.
The past few weeks, our morning comment recommendations have been greatly oriented towards the direction of Crude Oil prices. For most investors that do not have time to spend hours every day analyzing all of the outside influences that affect the movement of the stock market, Candlestick signals become a very important time-saving feature. The analysis of bond prices, the US dollar, Crude Oil and Natural Gas prices, the Asian markets, or any other investment entities that will have an influence on which direction the stock market will be heading, produces higher probabilities of being in the right direction in the markets and can be done relatively quickly.
Our current stock market recommendations have worked very successfully because we could evaluate what Crude Oil prices should be doing over the past few weeks. Utilizing chart trading patterns is the basis for technical analysis. Candlestick signals provide an extremely valuable element for analyzing what is happening at important technical levels. Most charting techniques are used for finding levels where something "might" change in a trend. Applying Candlestick signals to those techniques create a much more clear view of what is happening in investor sentiment. The signals reveal what is "actually" happening at those levels.
The most obvious chart pattern for the past few weeks has been Crude Oil prices. It has been the basis for our investment strategy during that time. The $55 a barrel price started showing Candlestick "sell" signals on the charts. The Bearish Engulfing Pattern in Crude Oil prices during late October signaled the top. The next question would be: Where would they bring prices down to? The first obvious support would have been the 50-day moving average. Whether shorting Crude Oil prices at the Bearish Engulfing signal or whether using that information to plan an investment strategy for equity trades, the use of trend lines, moving averages, Fibonacci numbers, or any other technical method can be used to estimate the time and magnitude of a trend move. Candlestick charts make this of valuation very clear.
If anticipating the price of Crude Oil to come down to the 200-day moving average and the stochastics to come back down into the oversold condition, it can be projected that there might be a few more days of strength in the stock markets
The Crude Oil prices, when starting to back off from the $55 a barrel level, and projected to maybe support at the 50-day moving average, should have given us a price target and also an estimated length of time that equity markets should remain positive. A definite advantage of Candlestick signals is that they give us a clear indication of what investor sentiment is going to be when that level is hit. Doing a very simple analysis, it is clear that the potential Bullish Engulfing Pattern (that occurred in early November) at the 50-day moving average, was not confirmed the following day. That should immediately have provided the evaluation fodder to project that oil prices were not supporting at that moving average and would continue their downtrend.
Once it broke through the 50-day moving average, having the knowledge of what are typical trend movements, a new evaluation can be put in place. By mid-November, it became apparent that the trend in Crude Oil prices was coming back up. Now the question becomes what will of the price do when it hits the 50-day moving average again? One of two things will happen. In the first scenario, the 50-day moving average is breached, showing that it is not a resistance to the new move up. This would be indicating that prices may now head higher, at least testing the $55 a barrel recent high. The second scenario would be that the 50-day moving average is going to act as resistance. If that is the case, a new pattern can be projected.
Because Crude Oil prices have been an influence on the stock market's performance, knowing what it does at that level becomes highly important. A break back to the upside in Crude Oil prices would mean weakness coming back into the equity markets. At that point, strategies could be put in place, whether taking profits on the long positions or adding short positions.
As was seen, when prices came back up to the 50-day moving average, we start to see the definite Candlestick "sell" signals. This creates a completely different strategy. Knowing that a chart trading pattern called the "Blue Ice Failure" is occurring, named by Dave Elliott of WallStreetTeachers.com, where once a trend comes down through a moving average, then comes up to test it and fails, now has a new highly predictable result. The continued downtrend from that failure will first have a high probability of going through the recent low of the trend with an additional high probability that it will move down to the next major moving average, the 200-day moving average.
Understanding what this pattern projects, the Candlestick signals become my very important element for seeing what investor sentiment is doing at those important support and resistance levels.
Stock Market Direction - Both the Dow and the NASDAQ direction have been fairly easy to project using the Crude Oil analysis. When Crude Oil prices were falling from the $55 a barrel area, equity prices moved up. When Crude Oil prices appeared to be coming up to test the 50-day moving average, equity prices in both the Dow and the NASDAQ had an opportunity to sell off. The sell-off could have been a distinct pullback or a consolidation period. As can be seen in the Dow chart, a few weeks back revealed two Evening Star-type signals. Stochastics were starting to roll over in the overbought area. This provided some opportunity to start taking profits.
Note however, when Crude Oil prices were moving back up, the Dow went through a period of flat trading. This was evident with the indecisive trading days shown by the Candlestick signals. Being that we already knew that the markets were being influenced by the Crude Oil prices, we could make some reasonable assumptions. The stock market was well in the overbought area. Crude Oil prices were bouncing back up. The opportunity for the Dow to pull back hard was there, yet it only went through a consolidation stage. At the same time, we were analyzing that the Crude Oil prices appeared to be hitting resistance at its 50-day moving average.