Candlestick Charting - Analyzing Candlestick Charts For Market Direction
The major advantage of Candlestick charting is that it immediately identifies investor sentiment. This becomes a critical element for placing positions in the portfolio. Understanding candlestick charting is the basis for putting the probabilities in your favor.
The Candlestick signals are the cumulative knowledge of all investors participating in the buying or selling of a particular trading entity during a specific period of time. This means that the candlestick sell signal in a specific stock is probably going to work even when the direction of the indexes is bullish. The logic tells us that the magnitude of a move in a stock price is probably going to be better if that particular stock’s Candlestick signal is correlating with the direction of the market. Using Candlestick charting to identify which way the markets are moving provides a platform for deciding whether to have longs or shorts in your portfolio. Candlestick charts provide a very valuable tool for investors.
Every day, on the financial news stations, we hear as many opinions as to why the market is going up as we do for the market going down. This past week the market was going down because of the possibility of interest rates going up. (Of course, corporations might not be making money if the fed rate went from 1% to 4%.)
In a couple of weeks it would not be surprising to see that the market is going up because interest rates are going up. The reason would be that the economy is getting stronger. The markets/prices do not move based on fundamental factors. They move based on the perception of what those fundamental factors will do to prices. That is why Candlestick charting becomes an important tool for analyzing what investors perceive.
Analyzing the Dow chart - Which way is the market going to go? If you listen to the professionals on Wall Street, they will tell you that you cannot time the market. Poppycock! If that were the case, we would not know the names of Warren Buffett and George Soros. Elliott wave, stochastics, Fibonacci numbers, and many other technical indicators have clearly illustrated through the years the investor psychology/prices move in cycles. Very rarely will you see a trend that does not oscillate up and down as it is moving. Candlestick charting, when analyzing the signals, can exploit huge profits from the markets.
For those of you that have been following the candlestick signals it should not be a surprise, as you learn to recognize the signals, that they occur quite often at reversal points. This should be a general assumption based on the fact that the signals have lasted for hundreds the years. This was all done without the benefit of computers. Adding computer technology to an already existing proven technique can add some additional enhancements to the correct trade ratio.
As described in our previous newsletter, the moving averages can become very important reversal points when used in the unconventional method. Normally, moving averages are used when two or more differing moving averages cross. However, in Candlestick charting they become important support or resistance areas.
Note the first arrow to the left is pointing out a period of indecision, a flat trading area with four or five indecision type signals. That decision became apparent with a bullish candle starting a good four-day rally in mid February. That rally was stopped by a Bearish Harami. The second arrow points out another period of indecisive trading, again with four or five days of Dojis. The last Doji, a Long Legged Doji, was a prelude to a direction move. The following day formed a Bearish Engulfing Pattern that closed down through the 50-day moving average, the blue line. Although the stochastics were in the oversold area, this revealed that a breakdown in the market was occurring. That bearish move was initially stopped by two Bullish Haramis, pointed out by the third arrow. That bounce was terminated by a Doji and the confirmed selling the following day. The fourth arrow revealed two more Dojis, again in the oversold stochastics area. That foretold of a potential reversal ready to occur again. That rally came to an end just above the 50-day moving average with a Hanging Man signal and confirmed the next day. The 50-day moving average on most stocks becomes an important pivotal area.
The 50-day moving average is an important element in Candlestick charting. It acts as a magnet for prices. This is best illustrated in the downtrend of the past two weeks. Note how the last two arrows indicate when the Dow came down through the 50-day moving average. The first day it ran back up and stopped right at the 50-day moving average. Four days later it came up and hit again. But notice the signal that it formed that day, a Doji, with the stochastics still in the downward direction. This is called a Blue Ice Failure. Researched by David Elliott at www.Wallstreetteachers.com, his studies show a very high percentage of the time that when prices move back up to the 50-day moving average, and seem to hit resistance at that level and fail, the prices will move down to the next major moving average, which in this case would be the 200-day moving average (the red line).