Grad Call 8-7-08: Candlesticks

In tonight’s call, we discussed various candlestick patterns as signs of short term trend reversals.  As you learn and use candle patterns, please remember that they are most effective when used with other technical tools as confirmations.  Below we have 2 of the  candle patterns that were discussed.  The data is pulled from www.candlesticker.com and a list of the other patterns discussed can be found at that website.   

We also looked at http://stockcharts.com/def/servlet/SC.scan.  This page can be accessed through the menu at www.stockcharts.com.  This page shows daily scan results of the market and looks for different candlestick patterns.  It is a great way to start observing different patterns and their results. 

Happy Trades,

Jeff

 Bullish Piercing Line Pattern is a bottom reversal pattern. A long black candlestick is followed by a gap lower during the next day while the market is in downtrend. The day ends up as a strong white candlestick, which closes more than halfway into the prior black candlestick’s real body.Recognition Criteria:

1. Market is characterized by downtrend.
2. We see a long black candlestick.
3. Then we see a long white candlestick whose opening price is below previous day’s low on the second day.
4. The second day’s close is contained within the first day body and it is also above the midpoint of the first day’s body.
5. The second day however fails to close above the body of the first day.

Explanation: The market moves down in a downtrend. The first black real body reinforces this view. The next day the market opens lower via a gap. Everything now goes, as bears want it. However suddenly the market surges toward the close, leading the prices to close sharply above the previous day close. Now the bears are losing their confidence and reevaluating their short positions. The potential buyers start thinking that new lows may not hold and perhaps it is time to take long positions.

Important Factors:In the Bullish Piercing Pattern, the greater the degree of penetration into the black real body, the more likely it will be a bottom reversal. An ideal piercing pattern will have a real white body that pushes more than half way into the prior session’s black real body.A confirmation of the trend reversal by a white candlestick, a large gap up or by a higher close on the next trading day is suggested 

The Bullish Abandoned Baby Pattern is a very rare bottom reversal signal. It is composed of a Doji Star, which gaps away (including shadows) from the prior and following days’ candlesticks.

Recognition Criteria:

1. Market is characterized by downtrend.
2. We usually see a long black candlestick in the first day.
3. Then a Doji appears on the second day whose shadows gap below the previous day’s lower shadow and gaps in the direction of the previous downtrend.
4. Then we see a white candlestick on the third day with a gap in the opposite direction with no overlapping shadows.

Explanation: We have a similar scenario that is valid for most of the three-day star patterns. In a falling market, the market shows bearish strength first with a long black candlestick and opens with a gap on the second day. The second day trading is within a small range and second day closes at or very near its open. This now suggests the potential for a rally showing that positions are changed. The signal of trend reversal is given by the white third day and by well-defined upward gap.

Important Factors:The Bullish Abandoned Baby Pattern is quite rare.The reliability of this pattern is very high, but still a confirmation in the form of a white candlestick with a higher close or a gap-up is suggested.