Major Candlestick Signals
The stock market indexes have been very lackadaisical for the past few weeks; a definite syndrome of the summer doldrums. Unfortunately most days are hardly worth sitting and watching, there is absolutely no movement in the market trends except for a total of about 30 minutes each day. The recent downtrend has occurred with very low volume. It seems as most investors are taking long vacations from the market this summer.
For those that are watching, the markets are now creating a decision point. The downtrend has been slow but persistent. Is this the time to close longs or is it time to buy? To make that decision, an investor needs a trading platform to provide something to go on. It is like the fellow that hears his wife yapping at the front door because she can’t get in and his dog yapping at the back door because it can’t get in. Who does he let in first? ... the dog, because he knows when he lets the dog in, it will stop yapping.
The decision of whether to sell here or to buy here has to have some logical basis. Candlestick analysis provides the criteria to make that decision. Understanding investor sentiment, through the use of Candlesticks, produces a game plan. Candlestick charts make the visual analysis very easy
Market Direction - The NASDAQ formed a Bearish Engulfing signal on Friday. It was a significant down-day in the NAS. Knowing the psychology behind candlestick signals produces a graphic alert to what might be happening in the market trend. The Bearish Engulfing Pattern at the bottom of a trend has a significant message. Normally, what we want to find is a bullish candlestick signal in the oversold area or a candlestick sell signal in an overbought area. A candlestick sell signal in an oversold area is not going to mean that much. However, the Bearish Engulfing signal in an oversold area does have meaning in candlestick analysis. It represents last gasp selling. As seen in Friday's trading, the NASDAQ’s Bearish Engulfing Pattern occurred when the stochastics were definitely in the oversold condition. This now provides an opportunity to evaluate what the trend should do from this point. If it is part of candlestick analysis that the Bearish Engulfing signal is a good potential reversal signal, then we should be watching for the next day of trading to produce a bullish signal.
If Monday's trading forms a Harami, Doji, or Hammer-type signal, it creates the opportunity to buy good “buy chart” positions with confidence. The probabilities should be in favor of this being a bottom. On the other hand, knowing that the probabilities are high, based upon the centuries of candlestick analysis, if a candlestick buy signal does not appear, then the down trend probably will continue. To fine tune the analysis, if the NASDAQ index opens higher on Monday, longs can be bought immediately. There would be a good potential to form a Harami or Doji, indicating that the selling had stopped.
The same scenario can be applied to the DOW. Note that it formed an Inverted Hammer on Friday. Again, the stochastics are in the oversold area. This also provides the set-up for buying if the Inverted Hammer is confirmed. The Inverted Hammer has an extremely high probability of illustrating a reversal if it opens higher on Monday. More details about the Inverted Hammer can be found on page 60 of “Profitable Candlestick Trading”.
Does this mean we are in for a major market reversal? Maybe, maybe not , but it does give the potential of at least a short term, small rally. Having this insight as to what the signals are indicating, the opportunity to get in at the bottom becomes that much better. The signals are indicating a potential bottom. Be ready to take advantage of that knowledge.