After a bullish day like Tuesday, expect some profit-taking first thing this morning. The Dow has already pulled back and tested the T-line. The NASDAQ opened lower but is now in the process of going positive.
Although the markets showed some strength last week, there was still one pattern that indicated a warning . The Dow confirmed a bullish Harami on Thursday and closed right at the 50 day moving average. This made for one last confirmation. The Dow needed to close above the 50 day moving average over the next couple of days to confirm the uptrend was back in progress.
Thursday’s bullish trading brought the Dow, NASDAQ, and the S&P 500 just slightly up through the T line. The only concern at this point is whether the Dow can get out through the 50 day moving average. Otherwise it could be setting up for a blue ice failure. This would indicate more downside for the markets if the 50 day moving average acts as resistance. Be nimble.
The premarket futures are indicating a relatively flat open today. The down trend remains in progress until we witness a candlestick reversal signal, such as the bullish Harami yesterday, with bullish confirmation. The bullish confirmation requires bullish trading after the Harami and a close above the T line. Anticipate another day or two of chop before stochastics get established as oversold.
What is the strongest of the 12 major candlestick patterns, or rather the entire list of candlestick signals? The Kicker signal. This signal demonstrates a severe change an investor sentiment. In fact, many investors suggest that if you see this signal then you should go long or short, depending upon whether it is bullish or bearish.
The kicker signal, as stated above, is the most powerful signal of all and it works equally well in both directions whether bullish or bearish. Its relevance is magnified when it occurs in overbought or oversold areas and it is formed by two candles. The first candle opens and moves in the direction of the current trend and the second candle opens at the same open of the previous day (a gap open), and then heads in the opposite direction of the previous day’s candle. The bodies of the candles are opposite colors and this formation is indicative of a dramatic change in investor sentiment. The candlesticks really do visually depict the magnitude of the change.
- The first day’s open and the second day’s open are the same.
- The price movement is in opposite directions from the opening price.
- The trend has no relevance in a kicker situation.
- The signal is usually formed by surprise news before or after market hours.
- The price never retraces into the previous day’s trading range.
- The longer the candles are the more dramatic the price reversal is.
- Opening from yesterday’s close to yesterday’s open already is a gap, however gapping away from the previous day’s open further enhances the reversal.
The kicker signal demonstrates a dramatic change in sentiment indicating that something has occurred in order to violently change the direction of the price. Usually a surprise news item is the cause of this type of move. The signal illustrates such a change in the current direction that the new direction will persist with strength for a good while. There is one caveat to this signal however. If the next day prices gap back the other way then many investors would strongly urge you to liquidate the trade immediately. This does not happen very often however when it does you will see many investors get out immediately.
The evening star pattern is a top reversal signal and it is exactly the opposite of the morning star signal. Like the planet Venice, the evening star foretells that darkness is about to set in, or in other words, it foretells that prices are about to go down. It is formed after an obvious uptrend and it is made by a long white or green body that occurs at the end of an uptrend. This typically occurs when confidence is finally built up. The following day gaps up however the trading range stays small for the day. Again, this is the star of the formation. The third day is a black or red candle day and it represents the fact that the bears have now seized control. That candle should consist of a closing that is at least halfway down the white or green candle of two days prior. The optimal evening star signal should have a gap before and after the star day.
- The uptrend has been apparent.
- The body of the first candle is white or green and is continuing the current trend.
- The second candle is an indecision formation.
- The third day shows evidence that the bears have stepped in and this candle should close at least halfway down the white or green candle.
- The longer the white or green candle and the black or red candle, the more forceful the reversal is.
- The more indecision that the star day illustrates, the better the probability that a reversal will occur.
- A gap between the first day and the second day adds to the probability that a reversal is occurring.
- A gap before and after the star day is even more desirable. The magnitude in which the third day comes down into the white or green candle of the first day indicates the strength of the reversal.
A strong uptrend has been in effect and the buyers can’t imagine anything will go wrong so they begin to pile up. However, it has now reached a point in the prices where sellers start to take profits and think the price is fairly valued. The next day all of the buying is met with selling which causes for a small trading range. The bulls then get concerned and the bears start to take over. The third day is a large sell off da and if there is big volume during these days, it shows that the ownership has dramatically changed hands. This change of direction is immediately seen in the color of the bodies.
Please continue to read about the 12 major candlestick patterns.
After the hard selloff yesterday, anticipate a small bounce in early morning trading. However, anticipate further selling if the bounce does not show any great resiliency. The 50 day moving average remains a very viable target for all the indexes. Maintaining strong bullish charts but be prepared to add some short funds or short positions in the portfolio over the next few days.