Stock Market Monitoring - How to Use Candlestick Signals.

Where it does the market go from here? Didn't the Bullish Engulfing signal of Wednesday in the Dow tell us the bottom had formed? What did Friday's sell-off tell us? Stock market monitoring produces the answers when using Candlestick signals. Remember what the Candlestick signals represent. They are the visual depiction of investor sentiment. Stock market monitoring has the same analytical applications as individual stocks. The signals provide information on what direction the market will be moving with a relatively "high probability" factor.

Wednesday produced a Bullish Engulfing signal in the Dow chart. This followed the Bearish Engulfing signal of the previous day. These indicators become significant information when stock market monitoring. When will the bottom occur? The probabilities became relatively strong, when witnessing a Spinning Top, with an Inverted Hammer confirmation the next day, followed by a Bearish Engulfing signal, that the bottom is near. As mentioned in the last newsletter, the Bearish Engulfing signal, occurring when stochastics are in the oversold area, does not provide the same analysis as witnessing a Bearish Engulfing signal in overbought conditions. A Bearish Engulfing signal in an oversold condition is usually the last gasp selling. It becomes a signal to start watching for a “buy” signal.

The “buy” signal became fairly obvious with a 135 point bullish day in the Dow on Wednesday. All of these signals occurred when the stochastics were in the oversold condition. The bottom of the Bullish Engulfing signal started “almost” at the 200-day moving average, a logical support area. So with all this evidence that a bottom should have occurred, then what was the trading action on Friday?

Keep in mind, the Candlestick signals provide a stock market monitoring system that allows an investor to evaluate the probabilities of a trend reversal. The important word in this previous statement is “probabilities”. The formation of Candlestick “buy” signals, in the right conditions, give us a good idea of what "should" be happening to a trend. The advantage of using Candlestick signals is two-fold in stock market monitoring and individual stock analysis.

Witnessing the formation of Candlestick "buy" signals, over the past week of trading, produced a specific evaluation. It was time to start adding long positions to the portfolio. However, the selling in the Dow on Thursday and Friday did not conform to the evaluation. This now produces a new scenario in our stock market monitoring.

MRO

Buying positions after Candlestick buy signals occur require one simple element, the evidence that the buyers are still present. As seen on Thursday, the markets opened slightly lower. Consolidation is usually anticipated after a large up move the previous day. The fact that there were very few “buy” confirmations on Thursday keeps the Candlestick investor from over committing new funds in the long direction. However, that does not eliminate being in positions that were confirming that buyers were around in specific sectors.

The second benefit of Candlestick signals is that they reveal which sectors are being bought even though the rest of the market may be selling off. This week revealed strong buying coming into the oil stocks again and the mining stocks. Some good profits were made in those positions even though the rest the market sold off Thursday and Friday.

Market Direction - Friday's pullback in the Dow just touched the 200-day moving average. It did not do that earlier in the week. That leaves the possibility that it needed to come back and actually touch it. How do we evaluate what to do from here? We have already developed an evaluation. Bullish Candlestick signals occurring in an oversold condition, very close to the 200 day moving average, are also very close to the previous low of late January. As we saw, Friday brought the Dow down to just touching the 200-day moving average. This makes the analysis of what to do very simple. Stochastics are in the oversold area, we have been witnessing buy signals for the past week, and Friday tested the 200-day moving average again. This should be very clear bottoming action. What would we expect from all these indicators? We should expect to start seeing some buying in the markets from this level.

DOW

The trading strategy, from our stock market monitoring evaluation, becomes very simple. If Monday reveals immediate strength, with the morning futures showing good positive movement, and with the DOW trading consistently above the 200-day moving average, anticipate a Bullish Harami forming by the end of the day. This would be more evidence that the buying was holding above the 200-day moving average. Start adding to the long positions the next day on confirmed buying indications.

On the other hand, being that it is so clearly evident that the 200-day moving average is the support and is also being confirmed by the low of January, seeing the selling take the market down through that level immediately tells us that there is more selling in this downtrend. Long positions should be closed out, except in the sectors that are remaining strong.

The Candlestick formation that goes through the 200-day moving average will give us important information. A long dark candle will immediately reveal that there was no buying strength anywhere at that level. The 200-day moving average is not going to act as support. On the other hand, a Doji or a Hammer or an Inverted Hammer will provide different information. There is still indecision at that level.

Do Candlestick signals always tell us what a trend will do? Not always, but with a fairly high degree of accuracy. Also, understanding what should occur after a Candlestick signal allows a Candlestick investor to immediately alter the positions of a portfolio if the expected results do not occur. As so often advised but never told how to implement, cut your losses short and let your profits run. If stocks were bought based on the indication that a bottom had formed, those positions should be immediately closed if those indicating signals are immediately negated. Having an investment strategy prepares an investor to move in and out of positions when the probabilities indicate what to do. There is absolutely nothing wrong with buying a stock position when all the indicators say to buy and immediately closing that position when those indicators are immediately negated.

Using the Candlestick signals as the trading strategy format will allow an investor to take the emotional decisions out of when to buy and when to sell.

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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.

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- The Candlestick Forum Staff

www. candlestickforum.com