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Short Term Stock Trading With Candlestick Signals

Short term stock trading is dramatically enhanced when utilizing Candlestick signals. Not only do the signals reveal high probability reversal levels, they allow the investor to analyze the directional forces of the markets. Having the ability to project the market trend with a relatively high degree of accuracy is vital for profitable short term stock trading.

Candlestick signals are highly relevant when viewed in overbought or oversold conditions. They are also relevant for identifying the nature of a trend. This information is critical for the short term stock trading investor. Evaluating what the signals are indicating at important support or resistance levels greatly improves the ability for identifying market direction. However, the appearance of Candlestick signals, that contradict the assumed market direction, allows the investor to quickly alter their short term stock trading strategy. The appearance of a Candlestick signal, aborting the projected current trend, will usually verify new market conditions.

That could be plainly seen in the trading direction of the Dow this past week. Last Thursday, the Dow formed a Spinning Top right at the 200 day moving average. Friday confirmed the support of the 200 day moving average with a bullish candle. The analysis of the market trend at that time would have been easy had the Dow come up and tested the 10,700 level and failed. However, the pullback was probably going to terminate on seeing the support at the 200 day moving average. That new strength would have provided a market projection of the trend continuing up to test the 10,700 level again and possibly breaking through. The stochastics curling up made this evaluation very viable.

Then a tropical storm moves to a category five hurricane in one day. The Bearish Engulfing signal the next day illustrates a change of investor sentiment. The previous analysis of an uptrend testing the recent highs becomes negated. The new investor sentiment is demonstrated with a new Candlestick signal. Stochastics turning back down reveal the potential of a downtrend moving to the next logical support level, the recent lows of August. The Candlestick signals indicate a negative bias that was started with a Bearish Engulfing signal. Once that sentiment has reached the oversold condition, with all the bad news built into the trend, the next ‘possibilities' start coming into the trend. The Candlestick signals provide a visual map of what investor sentiment is doing. That sentiment can then be attributed to whatever is being touted as the reason for the market move.

Market Direction - After the Hurricane Rita sell-off, the Dow moved toward the oversold condition. Thursday and Friday showed bottoming action as it bounced off of the same level that the Dow bounced off of in late August. These bottoming signals were attributed to the fact that Hurricane Rita was starting to lose strength, and may not be a category five hurricane when it hits shore. Also, the path of the hurricane appeared to be missing some of the major refineries. If the hurricane turns out to be much less destructive than first anticipated, the buyers should come back into the market. The S&P 500 formed a Spinning Top on Thursday while the low just touched the 200 day moving average. The Russell 2000 showed bottoming signals right where it bottomed in August.

Sector Strength - The heavy construction sector has been acting very well as can be expected with all of the infrastructure that needs to be rebuilt in the South. Also, the textile manufacturers have been performing well. As can be anticipated, large quantities of clothing will need to be bought in the hurricane areas.

Knowing that these sectors are getting investment dollars coming into the sector in general, the next logical step is to find the chart patterns in those sectors that have good buy signals.

As can be seen in the Sterling Construction Company chart, after the initial strong uptrend, the Dark Cloud signal illustrated the potential of a pullback. That pullback ended with the appearance of a Bullish Harami. The profit-taking was over. The buyers should be stepping back in once again. Having the ability to identify the end of an uptrend and the end of a downtrend can greatly improve trading profits. Also, the possibility of a J Hook pattern forming allows an investor to project where the upside target may be.


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