Stock Market Research – A Tiny Bit Goes A Long Way In Successful Investing
If you have been with us for awhile, you have seen that we like to keep things as simple as possible in our investing and trading strategies. Our basic stock market research has consisted of finding the charts with the candlestick signals we like, and then applying just a few other parameters which, based on over 21 years of research, forecast the greatest probabilities for profit.
Using our simple techniques, we have outperformed the markets for years. This simple system of stock market research lets you tell at a glance if the market is overbought or oversold. It shows an instant, clear visual picture of whether a stock should be bought or sold.
And we have to chuckle every time we see yet another article in the financial publications about a “New and Improved” system that is going to beat the market and make everyone rich. Most of the time the system is based on mathematics so complicated, one of our NASA scientists here in Houston could not even comprehend it.
Why do we think a stock market research system based on a mathematical formula or some other kind of “black box” system will never work in the long run? It’s very simple. The stock market is a market driven by human beings, with very human emotions.
Because of this, you need a system that can, in some fashion, measure the “human emotion” element in stock market trading. That’s why we based our system on Japanese Candlesticks. They are the closest means in the world to give a graphical representation of human emotions. Not to mention the fact that they are still around after 400 years.
Is our system of stock market research using candlestick patterns perfect? Far from it. No system is. But when you are trying to “predict the future”, you are playing with probabilities. And in over 21 years of stock market research, we have found nothing better than our system to maximize those probabilities. The candlestick charts make these opportunities very visually clear.
Stock Market Research Using Candlesticks Quickly Indicates Market Direction
Using Candlestick signals, you can evaluate the market direction fairly easily.
As you should have noted in our market comments each morning, the term "toppy" has been used regularly for the last week and a half. This “toppiness” was a little bit more evident in the NASDAQ than in the Dow. However, the toppy signals in the NASDAQ should have given an alert in regards to the Dow. The gap-up in the NASDAQ on January 16 should have been a warning, similar to the warning involved with the gap-up on January 2 and January 6. In both of those cases, the number of sell signals was not greatly evident immediately afterwards. And after the gap up on January 16, we could have been in the same strong uptrend as seen in the first two weeks of January.
The difference after January 16, however, was that we saw a Dragonfly Doji, a Spinning Top, then a Bearish Engulfing pattern, all bearish signals. It was then followed by another strong day. But the selling after that, another big black candle within a few days of the previous dark candle, should have alerted us that the Bears were starting to take over. Especially when the prices of the NASDAQ broke down below the bottoms of the last week and a half. At that point, the stochastics really started turning down. The great divergence away from the 50 day moving average made it more probable that the selling would bring prices back down close to the 50 day moving average.
The Dow, although slowly moving up over the last week and a half, was producing more and more Bearish Engulfing patterns. Finally the Bearish Harami, followed by weakness on Wednesday, verified the sellers were starting to take control.