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Technical Analysis Chart Formations - An Easy Read For Candlestick Signals

Candlestick signals simplify technical analysis of chart formations. The pending market direction can easily be identified visually. The element of dark bodies and white bodies allows an investor to interpret the daily price actions. This information, incorporated with the condition of the stochastics, becomes an immense analytical advantage.

Technical analysis of chart formations becomes critical when applied to portfolio positioning. Being able to identify market conditions topping out creates the mental preparation for taking profits. The fear of coming out of positions too early is greatly diminished. Being able to visually analyze that the market, in general, is pulling back, provides a good platform for coming out of positions.

The ability to identify major Candlestick signals provides a format for being in the right direction of the market at the right times. Technical analysis of chart formations should be a process that is done very quickly and accurately. The attributes of the Candlestick signals allow an investor to benefit from statistically proven trend reversal factors. The candlestick charts make them visually easy to identify


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Market Direction - For the past few weeks, the markets trended upward. Although the Dow appeared to be getting toppy, remaining in long positions was the correct recommendation. Why, if the Dow chart was not strong, was it deemed proper to stay in long positions? The reasoning is simple when utilizing Candlestick analysis.

The overall market trend is not based on fundamental reasons. Market trends are based on the perception of fundamentals. When investor sentiment is bullish, all the indexes will move positive. When investor sentiment is bearish, all the indexes will decline. Once a trend is in existence, investor sentiment can be analyzed based on the movement of the ‘majority' of the indexes.

As witnessed in the Dow for the past few weeks, some Candlestick sell signals have appeared. The trend traded flat in the Dow. Why would this be considered a bullish trend? The analysis of the other indexes is required. During the same time frame, the NASDAQ, S&P 500, and the Russell 2000 indexes continued to move higher. Very rarely will investor sentiment be so diverse in the equity markets that one major index will be advancing while another index is declining. Although this situation can occur, the vast majority of the time the indexes will move in tandem.

This makes the technical analysis of the index chart formations relatively easy. Trends will usually continue until all the indexes appear to confirm sell signals. All the indexes formed obvious Candlestick ‘sell' signals this past week. The Dow formed an Evening Star signal with the Hanging Man signal as the indecision day. Both the NASDAQ and the S&P 500 formed small Kicker signals during the week.

The Russell 2000 formed a Bearish Harami, which was confirmed. The evidence that selling was coming into all the market indexes revealed that investor sentiment had finally changed.

When stochastics are in overbought conditions, viewing major ‘sell' signals in all the indexes becomes a clear indication.


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Exploiting the Downside Move - The recommendation in the Member Area for the past week had been to start taking profits on charts that were showing ‘sell' signals. Continue to hold the long positions until sell signals appeared. Adding a few short positions would also be prudent. This was not inspired by any great wisdom, just common sense.

The markets were showing overbought conditions. Some sectors had already had fairly good runs. Taking profits in sectors that were topping out was the logical strategy. Could those prices go higher? Certainly, but that provided a couple of opportunities for the funds that were being freed up. If the markets continued higher, positions could be bought again. Upon seeing new buy signals, the positions could be bought back. On the other hand, the evaluation that other sectors were picking up strength might provide better profit opportunities.

Upon seeing that the selling was coming into the markets, short positions would be emphasized. As seen in the Macromedia Inc. chart, the technical analysis chart formation revealed a very high probability short trade. When the analysis reveals that the markets are in overbought conditions, establishing a few short trades with excellent Candlestick sell signals modifies direction risk. Having already established a few positions to the short side, moving from predominantly 'long' in a portfolio to relatively 'short' is not a cumbersome process.

 

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