The major benefit of candlestick analysis is the quick visual aspect that allows an investor to put the probabilities in your favor. This includes knowing when to buy and when 'not' to buy. One of the subtle aspects incorporated into candlestick analysis is simple rules that keep investors from getting into a position at the wrong time. May wheat illustrates a bounce in an uptrend. However, notice the bounced started with a non-candlestick signal. Common sense assessments can be made when a trend reversal appears to be starting without a candlestick reversal signal.

A bounce versus a complete reversal of a trend can be quickly assessed when witnessing sell signals at the first perceived resistance level. A Bearish Engulfing signal at the Tee line should have provided suspicion that the uptrend was not functioning with great force. Although the stochastics are in the oversold condition, a strong buy signal has not countered the current downtrend. The 200 day moving average could still be a likely target. Investors that had been short could have covered their positions, anticipating a bounce, and be prepared to re-short the position when more "selling" evidence appeared. Candlestick signals have powerful functional aspects that make profit-taking and reestablishing a position very easy to execute.

Another important function built into candlestick signals is confirmation that a reversal signal is working correctly. Illustrated in the LNG chart is an example of a bullish signal not getting the following confirmation needed. A small choppy area, double bottom, produced a bullish candle closing above the tee line. This became a good bullish signal. What do we want to see following a bullish candlestick signal? The Bulls still participating in the trend. As was seen the next day, the price opened approximate halfway down the previous candle and did not show any strength. This kept us out of a trade that did not have bullish participation. The significance of that facet of investing is that it keeps funds from being tied up in bad trades, allowing those funds to be immediately allocated to a trade that is confirming correctly.

LNG

The positive trading today moved both the Dow and the NASDAQ well above the Tee line. It should be noted that the pullback in the Dow for the past week of trading has consisted of indecisive formations. It becomes more obvious when the bullish candle's are formed with conviction. The Bearish Candles are formed in an indecisive manner. This continues to make the trend bias still in a bullish direction.

DOW

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Good investing,

The Candlestick Forum Team