Candlestick charts allow an investor to develop trading strategies that maximize profit potential. Unlike bar chart that illustrate what price movements did during a specific timeframe, candlestick charts reveal 'how' that price moved. Candlestick charts demonstrate what investor sentiment was doing during the timeframe and how it did it. This additional information creates a huge advantage for the candlestick investor. Although a price may have been up on the day, the candlestick chart will reveal whether a specific candlestick signal had been formed.

This information becomes valuable for projecting a reversal or a continuation of a trend.  The simple logic that is built into candlestick charts makes the evaluation for trade entry and exit strategies much easier to execute.  For example, a candlestick chart that reveals a price that closed higher on the day in an overbought condition may not have any relevance to somebody that does not  recognize a candlestick signal. However, if that price, during that day, had been much higher but closed near the lower end of the trading range, it may still appear as a positive day to somebody using bar charts or just reading the results of the day from the Wall Street Journal. Utilizing a  candlestick chart would reveal a different story.  A Shooting Star signal would have formed, providing a completely different scenario.

When the major signals appear  on candlestick charts, an investor can prepare for when they get in and out of trades with a much more clear analysis.  Being able to execute trades at an early stage of a reversal keeps an  investor from having to  execute less favorable trades when a trend is already in motion, trying to sell when the buyers are stepping away.  Candlestick charts produce the evaluation graphics that allow an investor to make decisions instantly.

Market Direction - What are the markets telling us? Both the Dow and the NASDAQ have been in the overbought conditions for the past few weeks.  The Dow has now reached the obvious resistance level at the 10,700 level.  The past three days of trading have demonstrated spinning tops.  This indicates indecision occurring at an important technical level.  Stochastics are now in the process of turning down.  As of yet, the selling has been indecisive.  Two scenarios can be put forth upon seeing this type of market condition.  The spinning tops could be illustrating the prelude to a pullback.  That will be confirmed by a long bearish candle in the next day or so. This would give a clear indication that the spinning tops were a reversal action. If the next few days show more spinning tops, doji, or other indecisive trading formations, without any severe selling, that would be more of an indication that the markets are not selling off, but just taking some profits at a major resistance level. A day or two more of indecisive selling could then be followed by another strong candle that would take prices up through the obvious resistance level.

The NASDAQ showed some minor indecisive trading over the past few days.  The large selling of Tuesday was followed by a hammer/doji formation.  Although the stochastics are turning over, the selling has not yet shown any severe sell signals.  A large bearish candle at this level would confirm the selling.  After the doji on Wednesday, any indecisive or positive trading would reveal that the uptrend may not be over.

What is the best way to position a portfolio with this type of market scenario?  Since the market direction is still in question, an obvious factor can be evaluated.  There are  stocks moving in a positive direction due to those sectors still remaining strong or at least have not revealed any sell signals.  There are other sectors/stocks that are now showing good bearish signals. When the direction of the market is in doubt, a prudent strategy would be to have both long and short positions open.  This becomes a much easier strategy to implement when utilizing the candlestick charts. The rationale is always that the candlestick signals are the cumulative knowledge of all investors buying and selling a particular trading entity during a specific timeframe.  Simply stated, the charts  still show bullish tendencies will probably not selloff as hard as the charts that show clear candlestick sell signals.  Of course, the opposite is true.  The charts that are showing candlestick sell signals will not move in a very bullish manner even if the market starts showing great bullish strength. This allows an investor to still produce a net profit from the proper positioning of long and short positions of the portfolio despite which direction the market may move with strength.  This becomes a very simple money management technique that can still take advantage of indecisive periods in the markets.

As illustrated    in the Advanced Energy Industries chart, a Shooting Star signal in the overbought condition illustrated that the buying was now been overtaken by the sellers.  No matter which way the market may move in the next few days, the probabilities are extremely strong that this stock price should continue its downtrend,  with the possibility of testing  the next support level, the 50 day moving average.                         

SHOOTING STAR

        (Nagare Boshi)

 Description

The Shooting Star  is also comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the top of an up trend.  The Japanese named this pattern because it looks like a shooting star falling from the sky with the tail trailing it.

Criteria

1.      The upper shadow should be at least two times the length of the body.

2.      The real body is at the lower end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.

3.      There should be no lower shadow or a very small lower shadow.

4.      The following day needs to confirm the Shooting Star signal with a black candle or   better yet, a gap down with a lower close.

Signal Enhancements

1.      The longer the upper shadow, the higher the potential of a reversal occurring.

2.      A gap up from the previous days close sets up for a stronger reversal move provided:

3.      The day after the Shooting Star signal opens  lower.

4.      Large volume on the Shooting Star day increases the chances that a blow-off day has occurred although it is not a necessity.

Pattern Psychology

After a strong up-trend has been in effect, the atmosphere is bullish. The price opens and trades higher. The bulls are in control. But before the end of the day, the bears step in and take the price back down to the lower end of the trading range, creating a small body for the day. This could indicate that the bulls still have control if analyzing a Western bar chart. However, the long upper shadow represents that sellers had started stepping in at these levels. Even though the bulls may have been able to keep the price positive by the end of the day, the evidence of the selling was apparent. A lower open or a black candle the next day reinforces the fact that selling is going on.

"High Profit Candlestick Patterns" could be available in as little as two weeks. If you have not yet ordered Stephen Bigalow's new book with the new ' high profit pattern flashcards' set, be sure to do it now,  so that you can receive your book as soon as they are available. Order today. Do not miss out on the insights that you can receive from this information packed edition.

Good investing,

The Candlestick Forum staff

Newsletter - Candlestick Charts Dipict Market Direction - November 16, 2005

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