Archives for August 2012

This article introduces the “On Neck Line” which is a bearish continuation pattern.

ON NECK LINE

Description
The On Neck Line pattern is almost a meeting lines pattern, but the critical term is “almost.” The On Neck Line pattern does not reach the previous day’s close but instead it only reaches the previous day’s low. It is important to understand the distinction because both candlestick patterns have very different meanings and can predict different outcomes. While the On Neck Line pattern is a rare pattern, it is still necessary to understand.

Criteria for the On Neck Line Pattern

• A long black (or red) candle forms in a downtrend.
• The following day gaps down from the previous day’s close. It is important to note however that the body is typically smaller than the body seen in the meeting lines pattern.
• The second day closes at the low of the previous day.

Pattern Psychology for the On Neck Line Candlestick Pattern
After the market continues to move in a downward direction a long black (or red) candle enhances this downtrend. The following day opens lower, with a small gap down, but the trend is halted by a move back up to the previous day’s low. The buyers in this upward move are typically uncomfortable considering there was no additional strength in the upward movement. Sellers will typically take a step back the following day to continue the downtrend.

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.

The average investor does not have to be dependent on the investment professional when utilizing candlestick patterns. Professional recommendations are not always in your best interest at the forefront. Whether totally unfamiliar with investment concepts or very sophisticated in investment experience, the Japanese Candlestick trading formations are easily utilized. The signals and patterns are easy to see and their interpretations are reliable.

Please continue to learn how to identify each different candlestick trading pattern as well as what that pattern indicates is occurring in the markets.

Description
The downside tasuki gap is another continuation pattern and it is found during a declining trend. When identifying a downside tasuki gap pattern you will see a black or red candle form after it gaps down from the previous black or red candle. The following day opens higher and closes higher than the previous day’s open. If the gap is not filled then the bears are still in control and many investors opt to short. If the gap is filled then that means that the bearish momentum has come to an end. When utilizing candlestick patterns it is important to note that you are mostly likely to come across the upside tasuki pattern rather than the downside tasuki pattern.

Criteria for Identifying the Downside Tasuki Pattern:

• A downtrend is in progress and a gap occurs between two candles of the same color.
• The color of the first two candles is the same as the prevailing trend.
• On the third day an opposite color candlestick opens within the previous candle, and it closes below the previous open.
• The third day close does not fill the gap between the two candles.
• The last two candles are opposite colors and are typically about the same size.

Pattern Psychology
When identifying the downside tasuki pattern, just the opposite is true of the upward tasuki gap. The Japanese put significance into gaps and when one appears in the middle of the trend and it is not able to fill itself on strength the following day, the momentum is still in the downtrend. The bounce-up day is typically interpreted as a short-covering day. After the short covering disappears then the selling continues.

Recognizing and understanding the psychology that forms the major candlestick patterns, the reversal patterns and the continuation patterns, will provide completely new insights for investors to understand optimal times to buy and sell. Japanese rice traders realized that prices do not move based on fundamentals but instead that they move based on the investor perception of those fundamentals.

When you learn how to utilize the candlestick signals correctly you now have the knowledge to improve your trading techniques for those trading entities you want to trade. You do not have to depend on canned programs that sometimes work and sometimes don’t work and you do not have to buy or sell stock recommendations blindly based on a research analyst’s recommendation.

“There are times to buy, times to sell, and times to rest.”

Most candlestick patterns are reversal patterns; however there are periods of trends that represent rest. Once a pattern is recognized it suggests a direction for future price movement. Continuation patterns, found in candlestick charting, help with the decision-making process. Whatever the pattern may be a decision must be made, even if the decision is to do nothing at all.

It is very important to learn the continuation patterns in addition to the primary and secondary candlestick patterns. In some cases the difference between a reversal pattern and the continuation of a trend can be subtle. Candlestick analysis provides the insight needed to know how minor price variations can affect the direction of a trend and lead to an enhancement of profits.

Each week we will select a continuation pattern and break it down into detail with the description, pattern criteria, and pattern psychology from the list below.

The Upside Tasuki Gap is found in a rising trend. A white or green candle forms after gapping up from the previous white or green candle, as shown in the illustration below. The following day opens lower and closes lower than the previous day. If the gap is not filled then the Bulls maintained control and it is time to go long. If the gap is filled, then the bullish momentum has come to an end. The description of a Tasuki, according to the Japanese, is a “sash that holds up one’s sleeve.”

Criteria for Upside Tasuki Gap

• An uptrend is in progress. A gap occurs between two candles of the same color.
• The color of the first two candles is the same as the prevailing trend.
• On the third day an opposite color candlestick opens within the previous candle and closes below the previous open.
• The third day close does not fill the gap between the two white or green candles.
• The last two candles, which are opposite colors, are usually about the same size.

Pattern Psychology of the Upside Tasuki Gap

Explaining the Tasuki Gap is pretty simple. The Japanese place significance on gaps. When one appears in the middle of the trend and it is not able to fill itself on weakness the next day, the strength is still in the uptrend. The pullback day is now interpreted as a profit-taking day.

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,  move onto the secondary candlestick signals and then eventually the continuation pattern such as this upside tasuki gap pattern.

The deliberation pattern can occur in both bull and bear markets. This pattern is formed by two long white (or green) bodies that are then followed by a small white (or green) candle. The deliberation pattern can resemble two other candlestick patterns, depending upon whether it is bullish or bearish in nature. The bearish deliberation pattern resembles the three black crows and the bullish deliberation pattern resembles the three white soldiers formation. It is important to note that the bullish deliberation pattern is a weaker pattern and is less popular than its counterpart, the bearish deliberation pattern. Many don’t use the bullish deliberation as a true reversal pattern but rather to signify a short-term price change indicator.

The bearish deliberation pattern occurs when there is a clear uptrend and is a bearish reversal signal. The first two candles have long white (or green) bodies and close near their highs. The last candle may open at or near the previous day’s close or it may gap up. This small third body is a sign of indecision over the current uptrend. It received its name because the Japanese say that when this signal occurs it is time for deliberation.

Criteria for the Bearish Deliberation Pattern:

• The first two white (or green) candles are relatively equally in length and are long candles
• The third day candle is a small body
• The small body opens at or very near the previous day’s close, or it may gap up slightly.

Pattern Psychology
The deliberation signal can occur after an up-trend or a bounce up during a long downtrend. Just like the advance block pattern, this pattern also represents buyer weakness. It can show the weakness in one day and indicates that a slow-down in the advance means that it is time for the bulls to get out. The deliberation pattern is slightly more difficult to recognize than the advance block pattern so be sure to carefully identify the characteristics associated with each candlestick.

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.