A major advantage of Candlestick formations is that they can identify dramatic changes in investor sentiment. One of the highest profit potentials for making money on big stock market trades is being able to analyze the investor sentiment upon a stock "breakout" situation. Utilizing the Candlestick formations to interpret the results of a breakout situation provides a huge advantage to the Candlestick investor.

A breakout is almost self-explanatory. It is the dramatic movement of a stock market trade moving out of its normal trading area. It also has the element of a significant percentage increase in its normal daily trading range. This is usually accompanied by a massive increase in volume. A breakout is usually the result of an unexpected event or surprise result of a company's operations. This can be affected by both internal as well as external factors. A prime example was Invision Technologies, the company that manufactures the luggage scanning machines at airports. 9/11 brought this company to the forefront. The huge move, an extremely large white candle in that stock price, far above its trading range for the prior six months, immediately revealed a definite change of investor sentiment towards this company. Breakouts, revealed using Candlestick analysis, immediately identify the stock market trades that have huge percentage gains potential.

Other breakouts are usually caused by new fundamental potentials within a company's product potential. Whatever causes the new investor sentiment in a stock, the resulting candle or candles provide the information needed that would indicate the upside strength of a new move in a stock price. Dynamic Materials Corp., BOOM, is a good illustration of a breakout. Note in the November chart, after trading for four years between $3 and $4 dollars a share, a news item created a new investor perspective on this company. The fact that the white candle, that broke this stock out, closed near the high end of the trading range was an indication that upon this stock doubling in price in one day, investors still felt confident to stay in the stock and not take profits yet.

BOOM

Very rarely is a breakout on strong volume and a huge percentage price move going to immediately fizzle and move back down to the previous normal trading area. However, not all breakouts immediately go up. But an inordinately large percentage do eventually move to much higher ground after the initial breakout. For those investors that have been following the stock picks over the past few years, AVII is one of our long-term holds. That "hold" recommendation was based on the promising future potential of this company’s products. But when will that potential become evident?

Seven trading days ago, an announcement about receiving patents created a breakout in AVII. A stock that trades approximately 100,000 to 300,000 shares per day moved up over 100% on over 40 million shares traded. This was a dramatic change of ownership in the stock. The Bearish Harami the following day indicated that there would be some pullback action. Friday’s chart, as can be seen below, formed a Bullish Engulfing signal right at the base of the bullish candle that formed the breakout. The last six days of trading have seen an average of 5 million shares traded each day. The Bullish Engulfing signal reveals that the profit-taking selling may have stopped.

AVII

The breakout tells us something. There is now a new dynamic in this stock. As with most breakouts, the stock trend has an extremely high probability of moving higher, the first target testing the breakout candle high at approximately $4.20. However, over the longer-term, meaning six weeks and greater, the upside potential could be higher. This is not a specific stock recommendation but it provides some educational background on breakout situations. AVII fits into that category.

Market Direction - The NASDAQ formed a Bearish Engulfing signal on Friday while the Dow sold off after a Hanging Man/Harami signal. This puts the market trend into a questionable period. Although the stochastics have just started heading up after the bullish signals in both indexes early this week, the last two days of the week indicated significant weakness. At this point, the direction of the market cannot be clearly indicated by the Candlestick signals. So, under these conditions, knowing what "could" happen from this level will be made easier to analyze on seeing what the market action does on Monday. Continued weakness on Monday would definitely have the stochastics turning back down. The first target, the close of Monday and the open of Tuesday, the low for the week, should now be watched to see if a Double Bottom could form. If there are no signs of stopping at that level, the downtrend could continue down to test the 200-day moving average. Weakness on Monday would warrant closely watching the recently purchased longs to see whether they should be closed out.

The DOW

The evidence of strength, however, would indicate that Thursday and Friday were merely pullbacks in an uptrend that was attempting to test the 50-day moving average.
If the market indexes hold up reasonably well on Monday, then adding to the long positions should be considered. Although this analysis may seem wishy-washy, the point of investing is to try to evaluate as quickly as possible what to do with investment funds based on analyzed movements. As has been recommended these past few weeks, remaining heavily in cash with moderate buying on this recent strength has been repeated. The moderate buying recommendation had the caveat of being ready to close out the positions immediately if the recent uptrend did not carry through.

Mr. Bigalow's second book, "High Profit Candlestick Patterns", is currently being written. This book is being directed toward taking the knowledge conveyed in "Profitable Candlestick Trading" and applying that information to reoccurring, easy to recognize trading patterns. It will be utilizing the knowledge of other well known analysts. The technical analysis they provide will focus on applications of the Candlestick signals to enhance their trading techniques.

In an attempt to provide an immense amount of knowledge for investors, any suggestions of what you would like to see explained in the book will be greatly welcomed and appreciated by Mr. Bigalow. The free forum on the Candlestick Trading Forum website, which is open to everyone, will have a category added for people who would like to add suggestions regarding the content of the "High Profit Candlestick Patterns" book. Also, be reminded that there is a constant flow of valuable information occurring every day in the forum area. If you have any questions or feel that you can add some knowledge to what other investors are sharing who want to improve their investment capabilities using Candlesticks, please contribute to the forum. It is free. All you have to do is register a username and password and you will have immediate access to the discussions.

The forum will also be the communication medium for understanding why positions were added or closed in the Hedge Fund trading. This will become part of the continuing education process for Candlestick investors to learn the insights that Candlestick signals provide.

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You should never be put in a position where you do not understand why trades are being made for your account. Whether those positions are being put on in your managed account, or a hedge fund, or your own personal trading, you should have a full understanding of whether those funds are being put in the right positions at the right time. The Candlestick signals applied with Candlestick analysis will become the education process for understanding how to maximize your potential returns in your own trading or being able to analyze whether a money manager has any concept of correctly timing the markets.

Good Investing!

- The Candlestick Forum Staff

www. candlestickforum.com