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Market Correction

Is the current fall in stock prices a market correction or a unique event based on external factors? When events such as back to back political turmoil in the North African countries of Egypt and Libya upset the stock market, common stock analysis typically considers such world events and their effects on stocks to be temporary. However, there are times when a market correction is due and simply triggered by an external event. Stocks have been moving up for some months despite long term investing concerns about long term economic growth and the effects of substantial national debt incurred in attempts to maintain credit and simulate the economy during the depths of the recession.

However, market trends are always subject to market reversal and both the day trader and the long term investor are well advised to keep in touch with market sentiment with technical analysis through the use of Candlestick stock charts. Technical analysis tools help the active trader reduce the market risk entailed in a market correction. The use of Candlestick analysis will not predict events in Egypt or Libya but will help predict market reaction to such events as events drive stock prices.

We wake up in the morning to news that riots in an oil producing country threaten oil stocks and oil futures. On another day the news reports tell us that shipping through one of the world’s two choke points, in this case the Suez Canal and not the one in Panama, is threatened. In each case there is an immediate market reaction in which individual stocks are swept along with a rising or falling tide. This is often a moment of market inefficiency. As traders catch up to the news and buy stock, sell stock, short sell stocks, or trade options there will typically be a period of market volatility. This type of situation may be anathema to the long term investor but can offer golden opportunity to the day trader using Candlestick patterns as his guide and Candlestick trading tactics as his tool.

Using the inherited wisdom of Candlestick signals the trader can often see the forest for the trees, to borrow an old expression. Because markets develop price patterns and because these price patterns are repetitive these same price patterns are predictive. A Doji candlestick, for example, indicates market indecisiveness. In a chaotic market after news that shakes things up, the Doji does not help us much. We obviously know that the market is uncertain. On the other hand, a Doji signal in an up-trending market can tell us that buyers are having second thoughts and that a market correction may well be in order.

After a series of chaotic events rock the markets sending prices downward a Doji candlestick may well tell us that sellers are reconsidering and that a market correction to the up side is about to happen. By using Japanese Candlesticks to read market sentiment both traders and investors can avoid the pitfalls of trading psychology, the twin demons of greed and fear, and accurately read the market in order to profitably buy stock and sell stock no matter which way the market is headed.

Market Direction: Why is it important to recognize price patterns? Trends have specific price movements. As we witnessed over the past couple weeks, the Dow has sold off but then has recovered nicely. Many investors will have usually taken profits or closed positions because the market had been trading lower. However, they usually do not have a prescribed game plan for went to reenter the market. This is a major advantage of candlesticks. It allows an investor to evaluate whether a pullback is merely profit-taking or a full-fledged reversal.


When the markets have a hard time being pushed down, investor sentiment keeps growing. A J-hook pattern setting up in the Dow could create a very strong price move from these levels due to the reinforced confidence. This makes for a very profitable market environment but with the caveat that at some point strong profit-taking will hit the market. Being able to recognize the candlestick sell signals, an investor will be able to recognize when the exuberant buying comes into the markets, leading to a sell signal.

Recognizing price patterns and enhances an investors ability to be in the right trades at the right time. As illustrated in our recommendation of BRKS, a slow curve pattern is developing. The result of a slow curve pattern is a strong price move. The price move will usually result in a much stronger return than a normal uptrending stock price. If a J hook pattern is setting up in the Dow, price pattern breakouts are more likely to occur in individual stock prices. Identify those stocks, then high profit trading strategies can be put into place.


Houston - Michael Thompson of Worden brothers will be presenting their new software program this Friday and Saturday. Meet with Steve on Saturday to watch the presentation and then grabbing lunch. The presentation will be located at 16011 Katy Freeway.

Chat session tonight at 8 PM ET – open to everybody, learn how to exit a trade and re-enter at the appropriate time. Also, look into a new option trading strategy that may have better benefits during a slow uptrending market trend.

Good Investing,

The Candlestick Forum Team

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