Candlestick Formations Stock Market Information Built In
Candlestick signals and candlestick analysis used correctly provide an immense amount of trend information. The stock market information revealed from the Candlestick signals over the past couple of weeks has produced the opportunity to make some big profits. As was noted in the past couple of Candlestick Forum newsletters, the Morning Star signal of late October produced a very opportune time to be buying long positions aggressively.
In keeping the charts relatively simple, the use of the 200-day and 50-day moving averages provides a potential target for a trend move, whether as support or resistance. The Candlestick formations provide another benefit when requiring stock market information. The moving averages become potential targets. However, the Candlestick formations reveal what the investor sentiment actually is when those targets are reached. Candlestick charts quickly reveal the efficiency of these formations.
Tuesday afternoon, rumors were running rampant that the tracking polls were indicating that John Kerry was well in the lead. Both the NASDAQ and the Dow, which had been acting relatively strong most of the day, started selling off upon those rumors. The Dow had just barely breached the 50-day moving average before pulling back and creating a Shooting Star signal. The fact that the signal was created based upon a Kerry win provided a game plan. A Kerry win was being revealed as detrimental to the market trend. The Shooting Star signal, if it had been confirmed the next day, would have made it clear that it was time to take profits.
However, the bullish candle on Wednesday, closing at about the 50-day moving average, gave us some valuable stock market information. The Shooting Star signal was not confirmed. The bullish candle, going through the 50-day moving average, revealed that the average was not going to be a deterrent to the uptrend anymore. This is not difficult analysis. The Candlestick formations provide a clear visual format for what investors are thinking at import technical levels.
Market Direction – Observe the obvious, the investment community apparently liked the results of the election. This is not said as a political statement. This is just observing what the candlestick signals were telling us based on election results. The most important factor is that investors are now apprised of what the playing field is going to be for the near future. The indecision factor can now be eliminated from investment decisions.
The fact that the Dow and the NASDAQ reached new recent highs, getting to those levels with strong white candles, has illustrated what the investor sentiment was during the post-election period. As you have seen in our morning comments, the recommendation to continue to hold the longs is predicated on the fact that for the last two weeks the bullish candles have not had any sell signal indications in spite of the stochastics being in the overbought area.
The fact that the Dow has reached new recent highs, exceeding the peak of early September, with a strong white candle on Friday, makes a longer-term analysis easier to understand. The Morning Star signals which appeared in early August and late October produce a Double Bottom set up. This latest rally, now exceeding the peak of early September, should indicate that the uptrend is now in effect.
The slow downtrend of the last eight months, where we saw lower lows and lower highs, may now be at an end. Depending on when this current rally ends, the expected pullback should, at worst, not come all the way back down to the recent low in late October. More likely, the 50-day or 200-day moving average may now become a support level.