Archive for the ‘Improve Your Market Timing’ Category

• The Piercing Line pattern is a two session pattern found in a bearish market.
• The pattern is most effective when found at a level of pre-defined support such as a double bottom or a major moving average.
• The candle will gap down and then proceed to trade up and close past the half way point of the previous bearish candle.
• The pattern is even more convincing as a reversal when the stock recovers from a significant gap to the downside and trades up with increased volume.
• The pattern is very similar to a Bullish Engulfing pattern but is not quite a bullish.

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• The Dark Cloud is a two candlestick pattern that is found at the top of a trend is bearish and warns us to “take out the umbrella” because a storm is brewing.
• The Dark Cloud forms with an initial gap up above the prior day’s close and proceeds to trade down and close at least half way into the previous day’s bullish candle.
• The Dark Cloud is a bearish reversal pattern and is enhanced if the move is accomplished with higher volume.
• The Dark Cloud appears to be forming a Bullish Engulfing pattern but does not trade low enough to engulf the prior day’s candle and is not considered quite as bearish as an engulfing pattern.
• The larger the bullish candle and the Dark Cloud candle, the more convincing the pattern becomes.
• The Dark Cloud Cover is the inverse of the Piercing Line pattern.

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• The Doji occurs when the stock opens and closes at the same level.
• It is an indication of major indecision in investment sentiment.
• It is important that we interpret the Doji in the context of the market.
• The Doji is a single candlestick pattern and is extremely powerful in foretelling a reversal.
• There are many variations of the Doji- The Doji Star, The Long Legged or High Wave Doji, The Gravestone Doji and The Dragonfly Doji.  Each has a slightly different story to tell.
• The primary message that the Doji sends is that there is a “Tug Of War” going on between the bulls and the bears.
• When found at the top of a trend, it may be prudent to sell if you are long the market.
• Dojis at the bottom of the trend although very significant require more confirmation for a reversal.
• Dojis found in a sideways channel are not very significant
• The market will not always reverse immediately after a Doji, but many times the reversal will occur very shortly thereafter.
• Dojis specifically and Candlesticks in general are extremely powerful when used in conjunction with other technical indicators that confirm resistance and support.

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We will spend the next several weeks analyzing Candlestick Patterns.  Candlesticks can on the face of it, be somewhat intimidating.  I think some of that is due to the names associated with the patterns and the seemingly endless number of patterns and how they should be applied.  In actuality, the candlestick contains the exact data that a traditional bar contains (open, high, low and close).

It is the visual nature of the candle makes it far superior to the bar chart.  Candles have been around for about 400 years and were first used in Japan by a family of legendary rice traders.  Through the years, patterns or configurations of candlesticks have emerged that can allow a trader to predict with a high degree of probability the reversal of a stock.  Candlesticks can be especially effective when used with western technical analysis.  So today, we will begin with the “Bearish Engulfing Pattern”

• As with any candlestick pattern, you must read and interpret it in the context of the chart.  What I mean by that is that if a reversal pattern appears, you must have a trend to reverse.  If a pattern that is normally interpreted as a reversal pattern is found in the context of a sideways non-trending market, that pattern means little to nothing.
• The Bearish Engulfing Pattern should be found at the top of an uptrend.
• The candle begins by gapping up above the prior day’s close and then trading down so that the close is below the prior day’s candle.
• It is only necessary to engulf the prior day’s real body but is even more convincing if the engulfing pattern encloses the high and low of the prior session.
• There are times when the Bearish Engulfing Pattern will engulf several prior sessions which adds to the validity of the reversal.
• The engulfing is more convincing when it occurs on increased volume which reflects the investment communities’ participation and sentiment on the move.
• We always look for follow through on the move as evidenced by  continuing bearish trading.

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• Stocks will typically channel 65-70% of the time.
• There are essentially three types of channels; Ascending, Descending and Sideways.
• The channel is comprised of two parallel trend lines which define support and resistance.
• The trading opportunity is as a result of buying the bounce off the lower trend line and selling the resistance.
• Channeling stocks as a continuation pattern occur as the stock trends and then consolidates for a period of time, only to eventually break out to resume the prior trend.
• Ascending Channels are usually embedded in a broader downtrend and act as a respite to the primary downtrend.
• Accordingly, Descending Channels are a respite in a broader uptrend and will more often than not resume the initial bullish trend after channeling.
• Sideways Channels are considered consolidations before resuming the original trend.
• The investment community recognizes that stocks neither go directly up nor down without pause.
• A majority of trading activity resides in channels as supply and demand play “tug of war”.
• Eventually traders will push the stock out of the range.
• The quality of the breakout/breakdown move should be measured by the investor participation as evidenced by increased volume.
• The opportunity to make money with channeling stocks are as a result of two approaches: 1) buy on the bounce off of the lower trend line and sell at the top of the channel at resistance and 2) Play the breakout/breakdown out of the channel.

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• This is a bearish reversal pattern that appears at the top of a trend and is characterized by a peak followed by a pullback and then a second peak that stalls at the level of the first peak and then retraces.
• The buyers at the top of the first peak were victims of buying from the “smart money” as they sold to the “not so smart money” at the top of the trading range.
• These unfortunate buyers will usually hold, refusing to take a loss and waiting for the opportunity to unload the stock at a breakeven.
• When that opportunity presents itself, at the second top, selling pressure increases and drives the stock lower.
• Other knowledgeable traders who know that the “Double Top” will present an opportunity to short, will do so, thereby increasing the downward move.

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• The Symmetrical Triangle is a continuation pattern that is comprised of two symmetrically converging trend lines.  The continuation will normally be in the direction of the prior trend, although at times the pattern can reverse the trend.
• The breakout usually occurs prior to the triangle reaching its apex and is strongest if that is the case.
• The target is the trend line breakout/breakdown plus the length of the widest part of the triangle.
• After the stock has moved either up or down relatively quickly and with increased volume, the stock then begins a period of pause as the stock moves sideways or with a slight retrace against the trend.
• The initial trading in the period of pause consists of a wider amplitude and narrows as the upper and lower trend lines converge symmetrically.
• The investment community is telling us that it is indecisive as to the continuing direction of the stock as the trading range narrows and finally breaks out to resume the trend.

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