Candlestick Signal Reversal Analysis ofStock Market Trends -
The stock market trends can be easily analyzed for reversals utilizing Candlestick signals. Being able to identify when the stock market trends are about to reverse provides a high profit investing advantage. Not only does being able to identify the reversal in stock market trends help produce profitable trading strategies, it also allows the Candlestick investor to cash in on high percentage moves right at the turns in a trend.
Usually when a trend reverses, whether in the market indexes, individual stocks, or commodities, it does so with significant percentage moves. The key word is "usually". The majority of the time, when a trend reverses, the Candlestick signals indicate a substantial change in investor sentiment. The first few days, or time frames, in a reversal are illustrated with a substantial move in the opposite direction of the current trend. Being able to identify when that trend reversal is about to occur provides some high profit opportunities. This initial opportunity can produce excellent swing trade returns of 3%, 5%, 10%, or 20% profit potentials in a very short time frame, before the first wave of profit-taking of the new trend takes place. Candlestick charts quickly identify these potential price moves
Being able to identify what normal human emotions occur at a reversal area and being able to graphically see it through Candlestick signals, also creates low risk trades. The low risk trade is produced by the simple logic that has formed the Candlestick signal in the first place. If all of the parameters for the set-up of a Candlestick reversal signal are occurring, which usually involves a trend being in an oversold (or overbought) condition, and the elements required to create a Candlestick reversal signal are starting to happen, such as a gap-down in an oversold condition, the Candlestick investor can place trades at optimal points.
Using this strategy creates a trading platform that greatly reduces the risk of having money exposed in a trade situation. The professionals always advise to cut your losses short and let your profits run, but they never seem to provide a methodology for doing that. The Candlestick signals create the proper format for cutting losses short. Candlestick analysis does not use numeric losses as a stop loss method. The reason is simple. The market does not care where you bought a position.
If you utilize Candlestick signals to buy the stock market trends at the optimal bottom point, by identifying a Candlestick "buy" signal in an oversold condition, then Candlestick analysis provides a very simple process for cutting your losses. If the purchase is made based on that "buy" signal, then logic dictates that if the selling pushes the price back down through the bottom of the candle that created a "buy" signal, then the "buy" signal was clearly overpowered by the sellers. This is not what we want after the appearance of a Candlestick "buy" signal. A Candlestick “buy” signal should be the first evidence that the buyers are now coming into the trend. That should mean that new buying should be evident after the "buy" signal. If the sellers were able to push the price back down through the "buy" signal, then that becomes a clear indication that the buyers have not stepped in. Close out the trade immediately.
If the Candlestick investor keeps in mind that the Candlestick signals provide a high "probability" that a reversal has occurred, then they can greatly reduce the element of human emotion. A Candlestick signal provides a "high probability" trade, not a guaranteed profitable trade. Put on a position based on the probabilities, with the understanding that if the buying does not continue as the "buy" signal indicated, then this was one of the trades that did not fit into the high probability results. Close out that trade, take a small loss, and move your funds to a "buy" signal that once again has a high probability of being in a correct trade. That is how to cut your losses short and let your profits run.
Market Direction - a Candlestick "buy" signal in an oversold condition creates a high probability of a correct trade. A Candlestick sell signal in an overbought condition has a high probability of turning the new trend down. However, there are a couple Candlestick signals that reveal the opposite, the Bullish and Bearish Engulfing Patterns. Witnessing a Bullish Engulfing Pattern in an overbought condition or a Bearish Engulfing signal in an oversold condition creates a different evaluation alert. A Bearish Engulfing Pattern in an oversold condition is usually the last gasp selling. This is when you want to start looking for a Candlestick "buy" signal. The same is true with a Bullish Engulfing Pattern in an overbought condition, the last gasp buying.
As seen in the NASDAQ index this past week, Wednesday formed a severe Hammer signal with the stochastics in the oversold condition. Thursday started out like a bullish reversal signal should, a positive open after a bullish signal. However, after the first few minutes of trading on Thursday it became apparent that the buying strength was not around anymore. The large sell off in both the NASDAQ and the Dow was not what was expected after a Candlestick buy signal. The NASDAQ formed a Bearish Engulfing Pattern while the Dow formed the very the same pattern. This provides the Candlestick investor with a framework to analyze what the market should do from there.
As seen in the charts, the Dow, after forming a bullish Hammer/Harami on Wednesday right on the 50-day moving average, gave a very compelling signal that the 50-day moving average was a significant support level. What should we expect after a bullish Candlestick signal right on the 50-day moving average? The appearance of more buying! Thursday did not reveal that buying. As observed in the morning comments, since the first of the year it has been recommended to be heavily in cash, with a few short positions on, and start to nibble at the long positions. That portfolio positioning was still in effect on Wednesday with the advice on Thursday morning to start buying aggressively upon seeing confirmed buying that day. That was a logical investment strategy based on the Candlestick signals. However, upon seeing the weakness of Thursday's trading, that advice should have been nullified. This would leave the portfolio positioning unchanged.
Now the analysis of what the market should do after Thursday's sell off is very easy. A further weakness in the indexes would have told us that the 50-day moving average may now not be a support level, that the next target could be the 200-day moving average. This would have been true had we seen continued selling on Friday. Or the next scenario, anticipating that the Bearish Engulfing signals at the bottom were an alert to start watching for a Candlestick "buy" signal again. Friday, as we saw, formed a Bullish Harami, indicating that the selling had stopped. This now makes the analysis for trading on Tuesday fairly easy. A Bullish Harami should be followed by continued buying to indicate a reversal occurring.
The strategy now becomes that if we see buying occurring on the open on Tuesday, then it is a good time to start adding long positions. Conversely, if selling is present, and comes back down through the open of Friday, it can be assumed that the sellers are still in control and the 200-day moving average becomes a higher probability of being in the next target.