Knowing the simple rules that are associated with each candlestick signal allows an investor to better evaluate what is occurring in a price trend. This information can be put to good use when analyzing the overall market trend. If you analyze each day of a price trend, extrapolating the information each signal conveys, you gain a much better perspective of what is occurring as that trend progresses. Note how the Dow finally made it to the 200 day moving average after the cradle/scoop pattern that formed at the 50 day moving average.

DOW

When the Dow reached the 200 day moving average, what type of signals appeared? The first day formed a Spinning Top. As we know, a Spinning Top represents indecision. A Spinning Top followed by a Bearish Engulfing signal illustrates the lack of bullish force at a major resistance level. What is the simple rule involving moving averages? The first time a moving average is touched, it will usually fail. Applying that information with  the fact that stochastics were in the overbought condition made for an extremely high probability of a pullback. Now the question becomes, "Where will the pullback move to?" This leads to a number of scenarios.

Is this a full-scale reversal, moving prices back down to test the 50 day moving average? Or is this a short-term pullback, getting set up for the next attempt of going through the 200 day moving average? Those questions become much easier to answer by knowing what should be expected/anticipated for each scenario. Wednesday's trading showed it could not move the Dow up through the 200 day moving average. The sellers took control. The Candlestick Forum analysis prepared investors for this possibility. When a resistance level starts showing candlestick sell signals with stochastics in the overbought condition, our term "be nimble" starts coming into play. It was time to take some profits in charts that were starting to show weakness.

Was this the time to get out of all the long positions? Not necessarily if the selling was merely profit-taking when the first major resistance level was touched. Today's prognosis became much easier. If this was merely a profit taking pullback, an indecisive trading formation should appear today. If the markets opened positive, there was a potential for a Bullish Harami or a Doji type day to occur. This would give a better indication that the big selling day was not carrying through.

Being able to analyze what the trend is doing allows the candlestick investor to make profitable decisions. Where other investors may panic and close out too many positions based upon a potential reversal, the candlestick investor can be more discriminate in which positions to take profits and which positions to continue to hold. That may be stating the obvious, but when looking into the future using today's charts, the decision making process can be done with more clarity when knowing what the probable results will be based upon how the next day opens and/or closes.

Analyzing a trend also involves recognizing patterns. Expected results from a pattern breakout can produce high profit potential's. Do all breakouts of a Fry pan bottom produce huge results? Not always, but the probabilities of that occurring are extremely high. As seen in ENER, one of our recent recommendations, the breakout of this pattern was confirmed with a big bullish candle. A strong move to the upside was now the expectation. This is the result anticipated from a Fry pan bottom breakout. Will they occur in one day? Definitely not! However, that type of result is expected whether it occurs in one day or two weeks. Candlestick analysis provides the information for easily recognizing when a high profit pattern situation is setting up.

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