It is often asked whether the candlestick signals are effective in long-term stock market predictions. Unfortunately, the answer to that is yes and no. Yes, in the sense that if the definition of long-term is two, three, or six months out in the future, the signals can be used on a monthly chart as effectively as they can on a one-minute chart. Keep in mind that the candlestick signals are the visual depiction of investor sentiment. Candlestick analysis is the evaluation of what the current and near future projected sentiment will be in a trend.

Stock market predictions of one year out into the future is not logical and any technical or fundamental analysis in this day of age. The reason is that with the information available on the Internet and TV on an instant access basis, investment decisions and psychology can change dramatically based on new information becoming available. To try to make stock market predictions for what will happen over the next 12 months is not a relevant exercise.

What looks to be a feasible projection today can easily be influenced by world events and/or the introduction of new competitive elements into a specific market. The purpose of candlesticks is not to project what will happen in a year from now, but to take advantage of what the investor sentiment is doing today. Today’s stock market projections can change dramatically at any point in time. The candlestick signals provide the opportunity to evaluate what investors are anticipating for the near-future. That short-term reversal signal may also alert the fundamental investor on new dynamics coming into the value of that company.
This makes candlestick signals an excellent timing factor for those that are investing in long-term fundamentals.

Market Direction – Another strong morning Star signal formed early this week in the Dow. The fact that the stochastics were on the oversold area in the morning Star signal was forming at approximately the same area as we are a double morning Star signal formed back in early August may just a very logical area to start buying.

The DOW Chart

That is why it was recommended to buy aggressively and in the pre-market comments the day after the doji formed. The current conditions of the stochastics indicate at the 50 day moving average 200 day should be the first target.

At the same time, the NASDAQ also formed a doji and although the buying was not at the same magnitude as the Dow the next day, Wednesday confirmed the buying when the NASDAQ closed above the 200 day moving average. Additionally it closed above the last recent high of early October with the stochastics starting back up. It has been healthy to see the selling early in the morning followed by buying in the afternoon the past few days. It would not be unusual to see the NASDAQ consolidate back to the moving average early next week before it continued its uptrend.

A more general analysis was illustrating that the market was not selling off in general. This would have been evaluated in the fact that the NASDAQ was trading sideways while the Dow was in a three-week decline. The assumption would be that money was shifting from sector to sector, not coming out of the market.

GAP UPS – The reversals in the market this week made for some very easy profitable trades, especially upon seeing gapping up from the moving averages. One distinct advantage Candlestick signals provide is a clear alert when to start buying aggressively. Note in the TARO chart, one of our recommendations this week, how the bullish engulfing pattern that formed right on the 50 day moving average. A gap up the next day produces a very strong up move. After the trend had initially come up through the 50 day moving average and pulled back to it, The bullish engulfing pattern becomes a clear indicator that the buying is occurring right on the support level. Stochastics start to curl back up. This becomes a very high probability trade upon seeing the gap up the following day.

Although this gap is very small, is still occurred right after a bullish signal at an important support level.

Gaps are your best friend. Using candlesticks signals, followed by gaps, provides a format for identifying extremely high profit trades.

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What is the psychology behind the formation of a gap? How is it effective after witness seeing a Candlestick buy signal? When is a gap the time to buy and when is it the time to sell? That is what the candlestick signals reveal. Are you afraid to buy a stock that has already moved 10% today? How can you evaluate whether that 10% gap up is the beginning at a 50% move? That is what the ability to evaluate what the candlestick signals are telling you can provide for you.

ISON

What did a gap up in the ISON chart tell us? Understanding what the candle reveals after a gap up puts you in positions to make 300% on a trade. There is a difference upon seeing on a strong candle, when the stochastics are already in an overbought situation versus seeing a weak candle at the top. The fact that the candle created after the initial gap up did not show signs of any selling that day was an indication that a new dynamic to come into the stock price. Note how the flat trading price, which in the case of ISON had been for over a year, now has new volume and higher prices coming out of a flat trading range. Had a shooting star formed that day, the evaluation of whether to enter this trade or not would have been completely different. We will constantly reiterate that this is not rocket science. This is common sense evaluations put into a graphic form.

When the market is sloppy, candlestick signals help to keep an account relatively flat. But when the opportunities present themselves in the markets, the candlestick signals become a very crucial identifying factor.

Good Trading!

- The Candlestick Forum Staff

www.candlestickforum.com