Archives for July 2012

The concealing baby swallow is a bullish trend-reversal signal and it is a very rare yet very reliable signal. The first two days of the concealing baby swallow, which are two black marubozus, demonstrate the continuation of a downtrend. On the third day the inverted hammer illustrates that the downtrend is losing steam. Notice the buying strength that is demonstrated as it gaps down on the open and then trades up into the previous day’s trading range. The last day opens higher and closes below the previous day’s close as it completely engulfs the whole trading range of the previous day. Although trading ends at the trend’s low point, the magnitude of the downtrend deteriorates significantly. Investors should expect buying to show itself at these levels.

Criteria for concealing baby swallow

• Two large black marubozus make up the beginning of this pattern and there should be no upper or lower shadows
• The third day is an inverted hammer formation and it gaps down from the previous day’s close
• The final day completely engulfs the third day (including the shadow)

Pattern Psychology
The bears are in control for a while (indicating that the downtrend is strong) and at the end of this downtrend two black marubozu days appear. The third day gaps down at its low and then trades up into the trading range of the previous day. The sellers then step in to negate the buying however the bears take notice of the buying that did occur. The final day opens higher, again, causing much concern for the sellers. As it sells off for the rest of the day, it offers the opportunity for shorts to cover their positions. The new closing low is not of the same magnitude of the previous down days of the trend. The buyers do not run into very much selling resistance from here as the trend is expected to reverse.

The concealing baby swallow is a highly reliable formation but please note that a bullish candlestick with a gap up or a higher close on the following trading day is necessary for confirmation of the trend.

Please continue to learn about more candlestick patterns.

The bearish advance block candlestick is comprised of three green or white upward candlesticks in a row with each candlestick opening below the close of the previous candlestick. Each candlestick also has a smaller range between its open and close than the previous candlestick. The advance block pattern is somewhat indicative as the three white soldiers candlestick pattern but it is bearish in nature. Unlike the three white soldiers pattern, the advance block pattern has consistently long candles and it shows signs of weakness.

The bodies of the advance block pattern are diminishing as prices rise. The upper shadows become longer which indicates that the bulls are getting more resistance to the bears. This pattern can occur in a number of different scenarios however it is most significant when it occurs in an up-trend or if it occurs during a bounce up in a downtrend. When you see this pattern it is visually obvious that the rise is losing its power.

Criteria

• Each white or green candle occurs with higher closes.
• The opens occur in the previous day’s body.
• The bodies are getting smaller and/or the upper shadows are getting longer.

Pattern Psychology
After an up-trend or a bounce up during a long downtrend, the advance block pattern will show itself with an initial strong white or green candle day. However, unlike the Three White Soldiers, each proceeding day becomes less and less strong. If the bulls try to take the prices up then the bears step in and take them back down. After three days of waning strength the bears should confirm the reversal with further deterioration. In other words, this confirmation is visually recognized by its bearish trading in a subsequent candlestick.

Candlestick signals identify where money is flowing in and out of stocks/sectors. Being able to identify and understand the investor psychology that creates the candlestick signals produces a huge advantage. It allows an investor to participate in stock investments that have an extremely high probability of moving in the right direction.

Candlestick patterns are created by common sense investment practices. Please continue to learn about the additional secondary candlestick signals.

The three stars in the south pattern is one of the bullish reversal secondary candlestick patterns and is the opposite of the advance block pattern. This pattern consists of three candlesticks that appear at the end of a downtrend. It is obvious that the trend is slowing down and that selling is weakening. This first candlestick very closely resembles the hanging man pattern. It is a long black (or red) body that occurs at the end of this downtrend. Its long shadow indicates that there was previous buying. The second candlestick resembles the first however it is the smaller version. The third candlestick is also a black (re red) body and is a Marubozu with no shadows. A bullish day following the three stars in the south candlestick pattern provides confirmation that the downtrend fizzled and then reversed.

Criteria for the Three Stars in the South

• The first black (or red) candle day has a lower shadow that indicates that the buyers are stepping in. It is almost a hammer signal.
• The second day produces a candlestick just the like the first but on a smaller scale.
• Day three should be a Marubozu with no shadows. It is within the previous day’s trading range.

Pattern Psychology
The daily formations begin to occur after the downtrend and they indicate bullish behavior in the stock. The second day indicates the same message on a smaller scale as it gaps up on the open and then closes lower on the session. The third and final day is completely engulfed by the first candlestick and price movement slows down. The bears should now be concerned about their positions. New lows are diminishing rapidly but this gives enough time for the short sellers to start covering their positions.

The secondary signals are titled as such because they do not appear as frequently as the 12 major signals. That does not negate the effectiveness of these signals for identifying reversals. Be aware of the implications of these signals and it will provide you with additional opportunities during the course of your investment decisions.

Today’s Pattern – The Breakaway Pattern

When you see either a bullish or bearish breakaway pattern, and the trend is evident, then the breakaway pattern indicates the acceleration of that trend. The breakaway pattern begins with a long candle representing the current trend. The following candle is the same color and it gaps away from that first long candle. While the third day’s candle can be either color, it will not show a change in the current trend. The fourth day continues the trend and therefore continues to produce the same color candles. The fifth day however, reverses the trend. Please note that it only opens slightly the opposite of the current trend and it continues in the same direction to where it then closes in the gap area.

Criteria for the Bullish and Bearish Breakaway Patterns

• The first day is a long-body day and continues in the same color as the existing trend.
• The second day gaps away from the previous close and it is the same color as the first day candle.
• Day three and four have closes that continue the trend.
• The last day is an opposite color day that closes in the gap area between day one and day two.

Pattern Psychology
After a trend, a long candle forms typically in an overbought or oversold area. The following day they gap the price further and that day continues in the same color as the current trend. For the next two following days the bulls and/or bears keep the trend going in the same direction, however with less conviction. On the final day, the trend moves opposite the existing trend with enough force to close in the gap area between day one and day two. This day completely erases the direction of the previous three days.

The secondary candlestick patterns are easy to learn once you have a basic understanding of the major candlestick patterns. Perhaps begin with the doji, bearish and bullish engulfing singals, as well as the hanging man signal to see how these signals can help you to produce profits in any market.

Today’s signal – Trading the Belt Hold Pattern – Reversal Signal

The belt hold is a reversal signal and its lines are formed by single candlesticks. The bullish belt hold is a long white or green candle that has gapped down in a downtrend. It moves higher for the rest of the day from its opening point (which is called a white opening shaven bottom or white opening maruboza). The bearish belt hold is just the opposite and is formed with a severe gap away from the existing uptrend. It opens at its high and immediately backs off for the rest of the day (which is known as a black opening shaven head or black opening maruboza). Belt hold comes from the sumo wrestling term, Yorikiri, which means to push your opponent out of the ring while holding onto his belt. The longer the body of the belt hold, the more significant the reversal signal is.

Criteria

• The candlestick body should be the opposite color of the prevailing trend.
• It significantly gaps open which continues the trend.
• The real body of the candlestick has no shadow at the open end. The open is the high or low of that trend.
• The length of the body should be a long body. The greater the length of the body, the more significant the reversal signal is.

Signal Enhancements – The longer the length of the body, the more significant the reversal pattern is.

Pattern Psychology
After a strong trend is in effect the trend is further promoted by a gap open. This gap is typically a large gap. The opening price gets to a point and then immediately moves back in the direction of the previous close. This makes the opening price the high or the low for the trend. This causes concern however and you will see investors begin to cover shorts or sell outright. This starts to accentuate the move and as a result the existing trend reverses.

Continue to learn about more candlestick patterns to see how it can greatly improve your profits! Primary candlestick patterns should be understood first (such as the doji and hanging man patterns). Once you have a basic understanding of the primary signals, then move onto the secondary candlestick signals.