Candlestick Signals - The Optimal Technical Analysis
What is technical analysis? Technical analysis is the study of patterns for the evaluation and projection of price movements based upon the previous characteristics of price patterns. Technical analysis utilizes the historic movement of prices and disregards any fundamental characteristics related to a trading entity. What ever parameters that are utilized, moving averages, trend lines, volume, advance/declines, Fibonacci numbers, Elliott wave analysis, stochastics, MACD, or anything else that you might consider, it all boils down to one basic premise. Technical analysis evaluates investor sentiment. Fortunately, candlestick analysis goes right to the core of what makes a price move – the study of investor sentiment. You could have the best company/stock in the world but if the investors do not like it, that price is not going to go up. You could have the worst company in the world, and if investors think it has potential it can make you a fortune. A good example is the high tech stocks of four and five years ago. Candlestick analysis does nothing more than show you do what the investors are thinking.
Market Direction - Back on March 17,18, and 19, what could have been the start of an upward rally in the Dow, an evening stars signal illustrated that the buyers have been overtaken by selling. This occurred even though the stochastics were not in the overbought area. The appearance of the signal gave clear evidence that what could potentially have been an opportunity for the buyers to move the prices up had been squelched after a day of indecision, the doji day, and confirmed with March 19 closing more than half way down the bullish candle of the 17th.
Note that during this past week, that we had the same signal appear, a bullish day followed by an indecision day, the Hanging Man formation, followed by a bearish candle that closed more than half way down the previous bullish candle. This all occurring right at the 50 day moving average area. Friday showed the Dow closing below the 50 day moving average. At the same time, the stochastics, in the overbought area turning are back down. The probabilities are extremely high that there should be a pullback. If further weakness is witnessed on Monday and Tuesday, the first possible support is at the 20 day moving average but there is a good possibility that this time they will test the 200 day moving average.
The NASDAQ in the meantime had moved up from the doji day of about two weeks ago with a gap up. The beginning of last week revealed a gap up again through the 50 day moving average. However this occurred with stochastics in the overbought area. That was the sign to start looking for potential sell signals. As seen on Wednesday, the NASDAQ formed a bearish harami. Logic tells us that if this trend was going to continue, we should have seen buyers on Wednesday. But Wednesday opened closer to the lower trading area of the previous day. That is not what was wanted to be seen if expecting the uptrend to continue.
Friday, as we saw, opened higher and immediately started selling off, closing at the lower end of its trading range for the day. This was another bearish candle. One of the major benefits of analyzing candlestick signals is that they give you a clear indication of what investors sentiment is at particular points of a trend. Any signs of weakness on the open on Monday should be an opportunity to take profits in the recent long positions and add some more short positions.