Market Direction – For the as two weeks, the NASDAQ has produced many indecision type days. Doji’s, and inverted hammers, hammers, all occurring when the stochastics have been in the oversold conditions. This would usually indicate that a major trend reversal is about to occur. However, this period of indecision has been in a slow downwards direction. The stochastics for the NASDAQ was just coming up out of the oversold area but now looks like they could be moving it backed down. The Dow has been showing some indecision days right on the 200 day moving average with the stochastics coming up all the oversold area. Friday formed another doji day.

The Doji in the Dow on Friday at lease provides a trading platform for Monday morning. A general rule of thumb is that the trend will move in the direction of how it opens on the day after a doji. The indications favor that some buying should be moving the trend upwards. However, these indications have been present for the last four to five days. If nothing positive happens on Monday or Tuesday, that would be an indication that the buyers are still not in this market and this may just be a consolidation before the next move down.

As you may have seen in the morning comments, it has been advised to be heavier in cash recently. The reason for this is that the signals are indicating that we are in a bottoming condition in the markets but there has not been any buying confirmation as of yet. It has been advised to buy lightly in this area but to be very nimble, be ready to close out positions as they get weak. This is contrary to the usual Candlestick investing philosophy. With 9900 trading entities out on the market, the candlestick signals can find enough good buy signals and sell signals to always have the portfolio completely invested. However, as we have witnessed in the NASDAQ, especially the last two weeks, each day is illustrating very indecisive investment sentiment. Up one day with the doji, down the next day with a doji, up one day with a hammer, down the next day with an inverted hammer. The candlestick signals are a very powerful investment platform for putting the probabilities of being in a correct trade in your favor. There are times in the market when those probabilities cannot be easily identified. The point of investing is to make money by exploiting the advantages of whatever trading program you’re using. When the market gets in a condition that those advantages cannot be put to good use, why have your money exposed? It is better to sit back in cash until the advantages can be utilized. This produces some mental rest and gets the mind clear for identifying the next move in the markets.

Example of Hammers in the Market

The one major signal that was produced this past week was the huge hammer that formed in both the NASDAQ and the Dow on Wednesday. The hammer represents selling at the bottom and finally the buyers stepping in. The long shadow to the down side is the obvious feature. It usually represents the very bottom of the downtrend. Unfortunately, the trading can continue to languish in the area of the shadow for a while. This could mean another few weeks of a sloppy sideways market if a signal does not appear showing which way the market will go. This all may seem very nebulous as far as projecting what the market should do, but there are times when the signals tell us that the market doesn’t know what it wants to do. This may be one of those times.

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HAMMERS
(karakasa)

Description 

The Hammer is comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body. Found at the bottom of a downtrend, this shows evidence that the bulls started to step in. The color of the small body is not important but a white candle has slightly more bullish implications than the black body. A positive day is required the following day to confirm this signal.

Criteria

1. The lower shadow should be at least two times the length of the body.
2. The real body is at the upper end of the trading range. The color of the body is not important although a white body should have slightly more bullish implications.
3. There should be no upper shadow or a very small upper shadow.
4. The following day needs to confirm the Hammer signal with a strong bullish
   day.

Signal Enhancements

1. The longer the lower shadow, the higher the potential of a reversal occurring.
2. A gap down from the previous day’s close sets up for a stronger reversal move provided the day after the Hammer signal opens higher.
3. Large volume on the Hammer day increases the chances that a blow off day has occurred.

Pattern Psychology

After a downtrend has been in effect, the atmosphere is very bearish. The price opens and starts to trade lower. The bears are still in control. The bulls then step in. They start bringing the price back up towards the top of the trading range. This creates a small body with a large lower shadow. This represents that the bears could not maintain control. The long lower shadow now has the bears questioning whether the decline is still intact. A higher open the next day would confirm that the bulls had taken control.

The first step to understanding the stock market is to understand basic stock information. By knowing what a share of stock is, it is easier to understand the workings of the entire stock market. Before you begin investing in the stock market, it’s time to get your basic stock information.

Among the stock market basics, the share is the smallest unit of ownership in a company. The size of a share varies from company to company. It can even vary within one company as it issues more shares or buys back shares that were previously issued. If you own a share of stock in a company, you are a part-owner of that company. The sum total of all your stock holdings is called your stock portfolio. If a company issues dividends, or profits, to the shareholders, you will likely receive money based on the number of shares you own. Each year, companies issues corporate results and basic stock information for their shareholders to review.

One of the stock investing basics of stock ownership is the concept of limited liability. If Ford loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock becomes worthless. This is basic stock information, but important to know; creditors can’t come after your personal assets. Whether as the result of a lawsuit or creditors, the worst losses you will experience investing in companies are losses on struggling stocks.

In the terms of basic stock information, the two types of stocks are:

• Common stock – This is the type of stock held by most individuals. Those holding common stock have voting rights as well as the right to receive dividends. Whenever you hear that a stock is going up or down, the reference is being made to common stock. While not all publicly traded companies have preferred stocks, all publicly traded companies have common stocks.
• Preferred stock – In spite its name, preferred stock has fewer rights than common stock, except with regards to dividends. Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call on dividends over common stock. Investors buy preferred stock for its current income from dividends, so look for companies that make big profits to use preferred stock to return some of those profits via dividends.

Liquidity

Another piece of basic stock information is that common stocks can easily be bought or sold, or they are highly liquid. Not all companies are traded daily but most of the larger companies appear daily on the stock market, giving investors the opportunity to buy or sell shares.

Conclusion

Learning how to invest in stocks is really a product of learning basic stock information and learning to understand to dynamics of a fascinating market. After learning basic stock information, forming a stock trading plan, and understanding technical analysis, a trader can begin to enjoy the hectic world of the stock market.

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Market Direction

There are some very simple rules in candlestick analysis. Most recently, we have been discussing that an up trend is shown to have reversed after a candlestick sell signal AND a close below the tee line. The opposite is true after a downtrend, a candlestick buy signal followed by a close above the T-line. This scenario occurred around March 10.

A close below the tee line after an extended uptrend clearly reveals a change in trend direction. This set of rules is very good for the longer holding swing trader. Simple commonsense assessments allows an investor to move more quickly. Today’s trading in the Dow is a very clear example of why a candlestick signal being confirmed is the first criteria for a sell decision.

Friday, both the Dow and the NASDAQ formed a Doji in a relatively indecisive trading day, options expiration day. As far as investor sentiment, there was nothing to indicate any change in the bullish trend sentiment. However, there was a Doji formed on Friday. This would not have any major significance other than what had previously been occurring in the downtrend. There had been previous Doji’s followed by selling, usually bringing the trend back down to the T-line. Although the trend continued to stay above the tee line, the magnitude of the trend was diminishing, meaning it looked like the Bulls were running out of steam. Visually being able to recognize that an uptrend is running out of steam makes an investor more prepared. A Doji at the top, followed by strong selling, might have more credence for forming a reversal.

DOW

Logic dictates that if the market appears to be losing strength and another candlestick sell signal has formed, the confirmation of that sell signal may have greater significance. The markets are in overbought conditions. Where is the first potential support level on a pullback? Once again, it could be the T-line. Taking profits on today’s open could have been a non-important activity had the markets supported at the T-line. In most cases, upon seeing the strength showing up at the T-line, many positions could have been repurchased. On the other hand, had the T-line not acted as support, as we witnessed today, the indicators showed the probabilities of closing some trades being greatly in favor of the investor. The market will tell us what the market is going to do. Evaluating that information correctly is very important for maintaining high profits.

A candlestick reversal signal, confirmed, is the first criteria for identifying a change of investor sentiment. The longer a trend persists, the more compelling the reversal signal needs to be. This makes the tee line in extremely important factor. It can be used in the anticipation of a reversal occurring as well as confirming that a reversal has occurred. Note in the FAZ chart, there have been numerous potential reversal signals during the downtrend. However, there should be one  observation that indicates the downtrend was still in progress. There was not a breach of the T-line.

FAZ

FAZ closed right on the T-line today. How do we use this to our advantage? Very simple, if we know what the tee line has represented in the past, we know what should or should not occur in the future. Today’s trading produced a gap up bullish candle after a Doji signal on Friday. This produced a confirmed buy signal. The only missing requirement was that it did not close above the T-line. Tomorrow’s trading strategy becomes very simple. If the price opens lower and does not show any strength, what can be assumed? The tee line continues to act as resistance. On the other hand, if the price opens above the tee line, a whole new set of assumptions occur. The tee line, which had acted as resistance, was now not acting as resistance after a strong buy signal in the oversold conditions. This would allow an investor to establish a position immediately without any hesitation.

Candlestick analysis is many simple if/then situations. The results are relatively predictable based upon hundreds of years of observations. Because investor sentiment works in constant reoccurring patterns, having the ability to recognize when the signal/patterns have occurred or might be in the process of occurring allows for a much faster execution decision-making process. You will gain bigger profits by recognizing when to move and when to move quickly. Please learn the 12 major signals and the Candlestick Forum patterns. The more knowledge you have about when a price move is about to occur, the better the buy and sell decisions can be made.

Good investing,

The Candlestick Forum Team

There are two main types of stock market analysis utilized by investors. They include other concepts, some of which will be explained in this article. When performing analysis on the stock market, there are many factors to consider, but first you must decide which method you would like to utilize.  Stock market analysis includes fundamental and technical analysis. Investors will typically stick to one method or the other and will typically not use both in tandem. 

Stock Market Analysis includes the concept of fundamental analysis. Fundamental analysis is the long-term assessment of a company’s financials in order to calculate how much the business is worth. This tells investors how much the company’s stock is worth to determine the potential shares the investor is willing to buy for that company. Investors who utilize this method also practice other concepts. These concepts include knowing the price to earnings ratio of a company, meaning that investors need to know what the company’s share price is compared to its earnings per share. Investors also need to know the dividend yield which is the company’s annual dividend payments and also need to know what the dividend per share divided by the price per share is for that company. There are other concepts included in this type of stock market analysis, but the main idea of fundamental analysis is bases on long-term investing.

Another form of Stock Market Analysis includes technical analysis. This type of analysis includes the forecasting of future financial price movements based on past price movements. This method can assist investors to anticipate what is likely to happen to prices over time. Technical analysts are not interested in the intrinsic value of a company but prefer to identify patterns that suggest future activity.  These investors use technical analysis tools, including the use of stock charts. The use of charts in this type of stock market analysis enables the investor to identify the underlying trends or stock chart patterns for that stock. They look for stock charts with rising trends and the familiarity with trend line formations can help to measure the overall attitude of investors towards stock and companies.

When performing technical stock market analysis the investor will take part and learn about stock charting.  When learning how to read stock charts the beginner investor should learn now to read four types of charts. Those include bar charts, line charts, point and figure charts, and candlestick charts. Many successful traders believe that candlestick chart patterns are the easiest and most beneficial to read. Unlike bar charts that illustrates what price movements did during a specific time frame, candlestick charts reveal ‘how’ that price moved. Candlestick charts demonstrate what investor sentiment was doing during the time frame and how it did it. This additional information creates a huge advantage for the candlestick investor when participating in stock market analysis.

When deciding which type of stock market analysis is right for you, please note that there are two arguments against stock fundamental analysis. The first is that a lot of the fundamental type of information is very subjective since it is based on each individual investor’s interpretation. The second reason is that stock technical analysis investors believe that fundamental analysis provides no real advantage. They believe this is due to the fact that all of the investing information is based on information that investors in publicly traded markets already know.

If you have decided to participate in stock market analysis, be sure you understand the advantages and disadvantages of both types. This will help you to make a decision as to which method you would like to practice.

All traders and investors want to buy stock at the lowest possible price and sell stock at the highest stock price. Just how do we do this? Fundamental analysis tells us what stocks are capable of but does not tell us just how high or low stock prices will go or just when they will peak or bottom out. Whether one is trading stocks directly or trading derivatives as in options trading or futures trading, timing is of utmost important in gaining trading profits.

Stock price pattern analysis tells the trader what the market is about to do. Using technical analysis tools such as Candlestick pattern formations traders can, in the words of Candlestick traders, let the market tell them what the market will do. Stock price pattern analysis works because stock price patterns repeat themselves, especially in large and fluid markets. Although everyone can do the fundamental analysis on a stock not all will trade that information the same. In addition, traders react to market movement and commonly drive a stock price higher or lower than the stock fundamentals dictate. It is from the ebb and flow of stock prices that stock price pattern analysis leads to profits.

Stock price pattern analysis is the basis of the technical analysis of stocks. Stock price pattern analysis comes down to comparing known patterns with what is evolving on the chart in Candlestick chart analysis. In a sense price patterns have a front half and a back half. Since, in our universe, time only moves in one direction, the front half predicts the back half in stock price pattern analysis. For example, when the stock market is coming to a consensus on a stock price the price pattern will often look like a wave form that is shrinking as it moves along. If one charts the movement of stock prices and draws a line from peak to peak and trough to trough it will look like two converging lines. If we imagine that the base of these converging lines is connected we have the makings of a triangle. When the upper side of this triangle is horizontal and the lower portion ascending this pattern often is indicative of a market coming to a consensus before an upward breakout in the stock price, a one stock market rally. This is an ascending triangle pattern. When the upper side is descending and the lower is level it is typically a bearish indicator and the stock will often break out to the downside.

There are many signals that are of use in stock price pattern analysis. A primary and very useful feature of Candlestick patterns is that the system is very visual. It contains all of the information of the markets but is typically easy to read and understand. Both the savvy day trader and those interested in long term investing can use stock price pattern analysis to buy stocks and sell stocks at the most advantageous and profitable prices. An old expression about learning about stocks was learning how to play the stock market. This expression dates back at least to the 1920fs before historyfs worst stock market crash. What traders and investors learned in the aftermath of that economic disaster is that a more disciplined approach to investing and trading can be profitable and is in no way the sort of gambling implied in this old expression. Using both fundamental and technical analysis pays dividends. Using a tool such as Candlestick chart analysis effectively helps predict the future by current stock price patterns to historic stock price movement.

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Market Direction

There is a universal thread throughout candlestick analysis. Each aspect of investing, using candlestick analysis. utilizes one basic premise. It is purely common sense and it consistently puts the probabilities in the candlestick investors favor. The description of investor sentiment involved which created a candlestick signal or pattern is easy to understand. Each signal merely reveals what was occurring in investor sentiment. This knowledge allows investors to make rational decisions. Is it time to buy? Is it time to sell? Is it time to continue to hold? The signals and patterns utilized in conjunction with other confirming indicators produces high probability results.

These same favorable results can be applied to each aspect of investing. Knowing what each signal has conveyed, and knowing where it occurred in regards to  confirming indicators, the analysis to enter or exit a trade also becomes easy to execute. Common sense questions and answers allows an investor to make decisions that dramatically improve the probabilities of when to enter a trade or not. There should be a logical result if there is logic built into candlestick buy signals. That logic may be as simple as what should be expected after seeing a candlestick buy signal? The answer should be simple. There is evidence the buyers are still participating. As can be seen WRC chart. It had a set up for a bullish trade. If this trade was going to be executed after the large Bullish Engulfing Signal, what should be witnessed? Evidence that the bulls were still in control. When the price opened at the lower end of the previous days body, that does not reveal the presence of bullish strength. This is where the trade would not have been executed.

WRC 

Although this is not rocket science, many investors will disregard the common sense aspects of investing and put on the trade. What is usually their rationale? They were buying at a lower price than where they expected, anticipating this trade should move higher. What they do not account for is the fact that there was no evidence the Bulls were going to be taking the price higher. What is usually the basis for buying at a lower price? Ego! Everybody wants to buy as low as possible and sell as high as possible. Unfortunately, that methodology does not necessarily equate to buying at high probability times.

The WNR chart reveals a different evaluation. The price continued to push against a resistance level without retracing. For this to be a successful trade, what should be expected after the little buy signals in early November? Bullish confirmation! Because the ego wants to buy at the absolute bottom and sell at the absolute top, most investors consistently lose money. The candlestick investor has the advantage of buying when the chart/signal says to buy and sell when the chart/signals say it’s time to sell. When you take your ego out of the investment decision, the probabilities of being in the right trade at the right time improve exponentially.

WNR

Chat session tonight at 8 PM ET. Everybody is welcome. Learn how to distinguish when it is time to buy and sell based upon the candlestick signals and the premarket futures.

Good Investing,

The Candlestick Forum Team

To trade commodities successfully traders ought to start by learning the basics of commodity trading. Trading commodities is really commodities futures trading. Producers and processors of commodities buy and sell futures contracts for delivery on a specific date during any of the next months or years. Producers and processors are typically hedging their investment risk and helping to provide a stable market for the commodity in question. Speculators can trade the same commodity futures contracts by buying and selling futures or they can buy options and sell options on futures contracts. Commodity and futures training is a good place to start learning the basics of commodity trading. For those interested options trading in commodities markets, Options Training with Stephen Bigalow will provide basic knowledge as well as the deeper insight gained from experience trading options in commodity futures.

Commodity futures as an asset class differ from stocks or long term bonds. A standard futures contract for corn futures, oil futures, or gold futures is a claim or a promise relating to a standardized quantity of a tangible asset. The claim for delivery or promise to deliver is on the contract expiration date. As a matter of fact, traders seldom hold a contract through to expiration but rather execute the opposite trade on the same commodity and expiration date in order to exit the trade. Because a futures contract has an expiration date it is not a claim upon the assets of a corporation. Supply and demand often cause pronounced commodity price shifts. Agricultural commodities are especially prone to large fluctuations in price as variation in weather conditions and amounts of crops planted or cattle culled from herds affect supply. The basics of commodity trading are that a trader in commodities is not concerned with competence of management, a margin of safety, or diversifying a stock portfolio into various market sectors. He or she is concerned with drought in Argentina or Russia, the opening of markets in Asia, or, in the case of gold, the seemingly continual devaluation of the US dollar.

The basics of commodity trading are that some commodities can be stored, like gold, oil, and corn. Some commodities, such as milk, have a short shelf life. Knowing the basics of commodity trading for a given set of commodities is essential for trading them. Traders should know that the decisions of large producers and buyers of commodities typically drive the markets in various commodities. Therefore, not all fluctuation in commodity prices is based upon the fundamentals of production and demand. It is also based on anticipation of market factors by large buyers and sellers. Thus, successful commodities trading requires the ability to anticipate the actions of other traders, the commodities market. Using technical analysis tools such as Candlestick chart patterns helps the trader see where the market is going. This is because trading patterns in commodity prices tend to repeat themselves. Knowing the basic Candlestick analysis patterns helps the smart trader with useful knowledge to successfully trade and profit from trading commodities.

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Market Direction

What is the most important indicator when analyzing candlesticks signals? There are numerous confirming indicators that improve the effectiveness of candlestick signals. Stochastics play an important role for adding credence to the candlestick signals. Major moving averages demonstrate good support or resistance potentials. The T-line demonstrates whether a trend is going to continue or possibly reverse. However, the most important aspect when using candlestick analysis is the signals themselves.

This was clearly demonstrated today in both the Dow and the NASDAQ. Yesterday both indexes closed just at the T-line. However, each had formed an indecisive Spinning Top formation. Both the Dow and the NASDAQ had stochastics showing oversold conditions. This would have suggested there was going to be more upside movement. The accuracy of trend analysis is greatly enhanced by knowing what each individual signal represents. Also, there are a few basic rules that can be applied to each signal.

DOW

Although the stochastics were in the oversold condition, starting to curl up, knowing what should occur after specific signals made today’s trading relatively simple. The trend/price is going to move in the direction of how prices open after a Doji/spinning top. When the premarket futures were slightly soggy and the markets immediately started selling off, this produced immediate information. The Bulls were not yet able to take the market up through the T-line. How was this information useful?

A weaker open after a Spinning Top, right at the T-line, would have made any buying of long positions today not be executed until prices showed bullish strength. The weak open provided the prospect that the tee line was still acting as resistance. The uptrend had to be confirmed with a candlestick buy signal, which both indexes demonstrated a few days ago, and a close above the T-line. The weaker open today should have delayed any long position buying and instigated closing any long positions that were showing weakness or also not able to break through the T-line.

This is not sophisticated trend analysis. The visual aspects of candlestick signals and the simple rules that are associated with them provide a common sense trading format. There are many if/then trading rules that illustrate what reoccurring investor sentiment is doing. Those thought processes are very consistent.
The effectiveness of reoccurring patterns provides huge profit potential in all trading entities. As illustrated in the October Live Cattle chart, the uptrend contained a number of pullbacks. Each time the price pulled back, it could be observed  the formations each day showed indecisive selling. This is a common indication the uptrend is just resting.

Dec Live Cattle

Obviously, knowing when  high probability buy setups occur, profits for the account can build up extremely fast. Having the ability to accurately analyze which direction the daily price chart will move allows for very profitable intraday trading. Knowing the daily bias is up, a trader can take advantage of the profit-taking during the day and buy back when the intraday buy signals occur. Once again, this is not sophisticated analysis. This is merely understanding the common sense information built into candlestick signals.

Chat session tonight at 8 PM ET — Everybody is welcome. Tonight we will discuss how to fine tune your trend analysis capabilities.

Good Investing,
The Candlestick Forum Team