Market Analysis - The Basis For Successful Investing
Candlesticks work successfully when trying to do market analysis on the market in general as well as an individual stock or commodity analysis. But simple logic says “why try to swim against the current”? If you could do correct market analysis, it becomes much easier to identify candlestick signals in stocks that are going to move with the market. Even though a sell signal will produce a downward move in a stock price in an up market, it may not move as strong as finding a good “buy” signal in a stock that will be moving up with the upward move of the market. Being able to use the candlestick signals to evaluate which way the market is going in general is a big factor in putting all the probabilities in your favor. Candlestick charts make visually analyzing the market trends and easy process
Market Direction - The Dow has not showing any decisive direction one way or the other. This past Monday, after a couple days of indecision, a hammer and a doji, it formed a strong buy candle. This gave the impression that right near the 50 day moving average, the Bulls were stepping back in. However, Tuesday saw Monday's gain given back. This would have indicated that the downtrend of the Dow over the past two weeks was going to continue.
Yet for the last three days, the Dow has formed three more doji's, all occurring at the 50 day moving average. Friday, with the economic news reports, formed a very long-legged doji. This reveals dramatic indecision. Again, this all occurring at the 50 day moving average. The stochastics are in an area that makes projecting the market direction inconclusive.
So how do the Candlestick signals help us analyze what the market is doing? For the last two weeks, the Dow has shown us very indecisive direction. But one of the rules of thumb is that a trend will move in the direction of how it opens after a doji. In the case of the Dow, after a Long-legged Doji, right on the 50 day moving average, if it opens up strong on Monday, we can anticipate a rally from here. And conversely, if the Dow opens substantially weaker on Monday, we can expect to pullback to lower levels.
Usually the NASDAQ composite can be combined with the analysis of the Dow to form an educated evaluation of what direction the markets are taking. Unfortunately, the NASDAQ has not given us any great directional bias the last week. After breaking down below the 50 day moving average, it has come back up and is bobbing just below the 50 day moving average. Stochastics are in the very middle of the chart with a flat direction, telling us absolutely nothing. For last four trading days, the NASDAQ has not been able to break through the 50 day moving average.
There are times is in the market that the direction cannot be projected. As you may have seen in the market comments each morning, in a wishy-washy market direction there is nothing wrong with being 50% long and be 50% short. The benefit of Candlestick's is that when you do have a situation that is showing indecision, you have the benefit of knowing what a trend will usually do after certain signals. As explained in the Dow comments, we have a doji providing us with a possible scenario upon how the market opens on Monday. The same is true of the NASDAQ at this point. If we see a strong day on Monday in the NASDAQ, in conjunction with a strong day in the Dow, it can be anticipated that the 50 day moving average will be breached on the NASDAQ chart. On the other hand, a weak day in the NASDAQ on Monday would become more evidence that the 50 day moving average was acting as a resistance. Failure to penetrate the 50 day moving average will be called a blue ice failure. Research has revealed that this failure would mean that the recent low at the 2000 level would be breached.