Technical Analysis Charts

SIGNAL FOR BUY - BULLISH ENGULFING

-The engulfing candle must completely "consume" the real body of the previous  candle.

-Because stocks have fewer gaps than commodities, an engulfing candle may  violate this rule very slightly by being just above or below the top or bottom of the previous candle.

-In most cases, you should interpret this as an engulfing pattern.

-A bullish engulfing candle occurs after a significant downtrend.

-Note that the engulfing candle must encompass  the real body of the previous candle, but need not surround the shadows.

  
Below you will find an illustration of a bullish engulfing candle:

SIGNAL FOR SELL è BEARISH ENGULFING

-A bearish engulfing candle occurs after a significant uptrend. Again, the shadows need not be surrounded.

Below you will find an illustration of a bearish engulfing candle:

The powe of the engulfing candle is increased by the following factors:

-The SIZE of the candle and the VOLUME on the day it occurs.

-The bigger the engulfing candle, the more significant it is likely to be. A large bullish engulfing candle says the bulls have seized control of the market after a downtrend.

-A large bearish engulfing says the bears have taken command after an uptrend.

-If volume is above normal on the day when the signal is given, this increase the power of the message.

TECHNICAL ANALYSIS CHART (PART 2 : DARK CLOUD COVER WARNS OF IMPENDING MINOR TOPS )

-It is a close relative of the bearish engulfing, but is not quite as negative in its implications.
-Still, the appearance of this candle should be a warning to the trader to protect profits in a position.
-It also suggests that you should watch a stock as a possible short candidate in the trading days ahead.
-The Dark Cloud Cover candle occurs after a strong uptrend.

-A series of ascending (uptrend) candles is ultimately "capped" by a final white candle. At this point, the stock or index seems technically healthy and the bulls may be lulled into a sense of false complacency.

-On the day of the dark cloud cover, the stock opens above the previous day's high.

-For a true dark cloud cover to emerge , therefore, the stock should gap above the upper shadow of the previous white "capping" candle. At the opening bell on this trading day, it seems like the uptrend will continue. As the day wears on,however, the bears wrest control.

-On the dark cloud cover day, the stock closes at least halfway into the previous white "capping" candle. The larger the penetration of the previous candle (that is, the closer this candle is to being a bearish engulfing), the more powerful the signal.

-Traders should pay particular attention to a dark cloud cover candle if it occurs at an important resistance area and if the end-of-day volume is strong.

Below you will find an example of a Dark Cloud Cover candle:

TECHNICAL ANALYSIS CHART (PART 3 : THE HARAMI IS "PREGNANT" WITH TRADING POSSIBILITIES )

-When you visualize the harami candle, you should imagine that the first candle is like a mother and the second candle the child that emerges from its belly.

-The harami candle can occur both after an uptrend or downtrend. To keep this discussion clear, however, for example I will assume a stock is in a uptrend.

-Immediately preceding the harami candle, there should be a large, real body white candle. When this candle occurs, the bulls appear to be fully in the driver's seat.

-The next however, a small real body candle appears within the larger real body. This is the harami candle.

-Clearly, the reversal signal is more potent if it is the opposite color, as this color change shows that the decline has stalled.

-The bulls are now on strong ground and are engaged in a struggle for power with the bears.

-The upper and lower shadows can be of any size, and theoretically could even go above the real body of the clear candle day. In practice, however, the harami day's shadows are often small and are typically contained well within the real body of the previous day's candle.

-Always look carefully at the next day's candle -- the one that follows the harami candle. Sometimes harami merely signifies that the stock is entering a period of consolidation (the shares will trade sideways).

-If, however, the stock you're examining rallies the day after the harami candle takes place, then there is an increased likelihood that the shares have put in a Minor bottom.

-While the harami candle is considered less potent than many of the key reversal candles, it nevertheless has substantial predictive power.

-If it occurs in a stock in which you have a position , then you should be alert to a change in trend from up to sideways, or even up to down. (If the stock is in a downtrend, then the harami candle can also warn of an impending period of sideways trading, or perhaps even an uptrend.)

-The next time you observe the harami candle, take note, as it can provide you with a valuable tool to help you protect your profits.

TECHNICAL ANALYSIS CHART (PART 4 : THE PIERCING CANDLE IS A POTENT REVERSAL SIGNAL )

-Whereas the dark cloud cover warns that an uptrend might be coming to an end and is thus a signal to take profits on long trades, a piercing candle intimates that a downtrend may be about to reverse and shorts should be covered.

-The first thing to look for to spot the piercing pattern is an existing downtrend. With daily candles, the piercing pattern will often end a minor downtrend (a downtrend that often lasts between five and fifteen trading days).

-The day beforethe piercing candle appears, the daily candle should ideally have a fairly large dark real body, signifying a strong down day. Here is an example of the piercing candle:

-In the classic piercing pattern, the next day's candle gaps below the lower shadow, or previous day's low. I find with stocks (in comparison to commodities), however, that the gap is very often below the previous day's close, but not less than the previous day's low.

-On the piercing day, the candle comes back into and  closes at least halfway into the real body of day one. If it does not come at least halfway back, then the candle is not a piercing candle and needs to be called by a different name.

-(The candle is "on-neck" if it closes at day one's low, "inneck" if it closes slightly back into day one's real body, and "thrusting" if it closes substantially into the real body, but less than halfway.)

-In addition, the second day's candle cannot totally make up the ground lost in day one, otherwise it would be a bullish engulfing.

TECHNICAL ANALYSIS CHART (PART 5 : THE SHOOTING STAR CAN WOUND )

-The shooting star can only appear at a potential market top. If you are looking at a daily chart, then it is possible that this candle will warn of a reversal in the Minor uptrend.

-Since a minor uptrend typically lasts between six and fifteen days, the swing trader should be very alert if the Minor uptrend is mature.

-If a shooting star occurs after a candle with a large real body it typically is that much stronger a warning since it shows price can not sustain high levels. The day the shooting star ccurs, the market should ideally gap higher (although with stocks rather than commodities, this gap is sometimes not present).

-The stock should then rally sharply. At this point, it appears as though the longs are in complete control. Sometime during the day, however, profit taking ensues.

-The stock closes near the unchanged market, as shown by a small real body. A shooting star therefore has a small real body and a large upper shadow. Typically, there will be either no lower shadow or a very small one.

Here is a graphic representation of a shooting star candle:

-The small real body shows that the bulls and bears are at war with each other. Whereas the bulls had been in control during the uptrend, the two sides are now evenly matched.

TECHNICAL ANALYSIS CHART (PART 6 : BULLISH ENGULFING )

-The bullish engulfing is most significant when it occurs after a prolonged downtrend. The stock or index has been selling off sharply. On the day of the bullish engulfing, prices will often start the day by falling. However, strong buying interest comes in and turns the market around.

-The bullish engulfing is named because this candle surrounds or engulfs the previous one. The bullish engulfing represents a reversal of supply and demand. Whereas supply has previously far outstripped demand, now the buyers are far more eager than the sellers. Perhaps at a market bottom, this is just shortcovering at first, but it is the catalyst which creates a buying stampede.

-When analyzing the bullish engulfing, always check its size. The larger the candle, the more significant the possible reversal. A bullish engulfing which consumes several of the previous candles, speaks of a powerful shift in the market.

TECHNICAL ANALYSIS CHART (PART 7 : THE HAMMER)

-This hammer marks a reversal off a bottom or off an important support level. On  the day of the hammer, prices decline. They hit bottom and then rebound sharply making up all the groun– and sometimes more – compared to where the sell-off

started. The candle shows that the buyers have seized control. A bullish   candlestick on the following day confirms this analysis.

TECHNICAL ANALYSIS CHART (PART 8 : THE DOJI REVERSAL )

-If you were to learn only one candle by name, this would have to be the one. A "common" doji, is shaped like a cross. A doji has no real body. What it says is that there is a stalemate between supply and demand. It is a time when the optimist and pessimist, amateur and professional are all in agreement. This market equilibrium argues against a strong uptrend or downtrend continuing, so a doji often marks a reversal day.

-A doji in an overbought or oversold market is therefore often very significant. The opening of the next day should be watched carefully to see if the market carries through on the reversal. Note, a candle with a very small real body often can be interpreted as a doji.

-I find it intriguing that the same candlestick patterns repeat over and over. Candles are your personal sentry providing you with consistent early warnings of impending trend change. They provide the earliest signal I know of that the patterns in the market are about to reverse.

-All in all, there are about 100 candles patterns the trader can become familiar with. Of these, 21 candles recur frequently enough and are significant enough that the trader should be able to spot them by name. Knowing their names allows you to spot them more easily and assess their implications. When faced with the need for a quick decision during the heat of trading, the trader who can name these 21 candles has a distinct advantage over one who can't.

TECHNICAL ANALYSIS CHART (PART 9 : SIGNAL KEY REVERSALS
HAMMER AND HANGMAN CANDLESTICKS )

-The doji candle is probably the single most important candlefor the trader to recognize. Not far behind in value are hammer and hangman.

-It is easy to get these two candlesticks confused since they look identical. Both the hangman and hammer have a very long shadow and a very small real body. Typically, they have no upper shadow (or at the very most, an extremely small one).

-To be an "official" hammer or hangman, the lower shadow must be at least twice the height of the real body. The larger the lower shadow, the more significant the candle becomes.

-How can you tell the two candles apart? The hangman candle, so named because it looks like a person who has been executed with legs swinging beneath, always occurs after an extended uptrend. The hangman occurs because traders, seeing a sell-off in the shares, rush in to snap up the stock at bargain prices.

-To their dismay they subsequently find they could have bought the stock at much cheaper levels.

The hangman looks like this:

-On the other hand, the hammer puts in its appearance after a prolonged downtrend. On the day of the hammer candle, there is strong selling, often beginning at the opening bell.

-As the day goes on, however, the market recovers and closes near the unchanged mark, or in some cases even higher. In these cases, the market is potentially "hammering" out a bottom.

Here is an example of a hammer candle:

-As with all candles, the "rule of two" applies. That is to say, a single candle may give a strong message, but one should always wait for confirmation from another indicator before taking any trading action.

-It may not be necessary to wait an entire trading day for this confirmation. When   it comes to the hangman, for example, confirmation may be a gap down the next day.

-With the hammer, a gap opening with gathering strength as the day wears on may be all that is necessary to initiate a trade from the long side. I will start with the hammer. In my experience, when a hammer candle appears in the chart of one of the major averages, it is always a signal worth noting.

-This is particularly true when it has come after a steady and prolonged sell-off.

TECHNICAL ANALYSIS CHART (PART 10 : THE THREE CANDLE EVENING AND
MORNING STAR PATTERNS SIGNAL MAJOR REVERSALS )

-A doji candlestick, whether it occurs after a long uptrend or downtrend, indicates that supply and demand are in equilibrium and that the recent trend may be coming to a conclusion.

-Several major reversal patterns consist of two candlesticks. A bullish or bearish engulfing candle often signals a trend's conclusion. This two-candle pattern is also relatively easy to spot.

-The evening star and morning star are, in my experience, harder patterns for the eye to pick out. The reason for this is simple -- since both patterns consist of three candles, these candles must be perceived as a group.

-However, once you've identified one of these patterns, then your job is pretty much over. Unlike most other candle formations, no further confirmation is needed.

-The evening and morning star are complete in and of themselves, so the trader should strongly consider taking trading action immediately upon their appearance.

-The evening star pattern occurs during a sustained uptrend. This is my nursery rhyme for the evening star: "IF YOU SEE THE EVENING STAR, A TOP IS OFTEN NOT VERY FAR.

-On the first day we see a candle with a long white body. Everything looks normal and the bulls appear to have full control of the stock. On the second day, however, a star candle occurs.

-For this to be a valid evening star pattern, the stock must gap higher on the day of the star. The star can be either black or white. A star candle has a small real body and often contains a large upper shadow.

-The star communicates that the bulls and bears are involved in a tug of war, yet neither side is winning. After a sustained uptrend, those who want to take profits have come into balance with those eager to buy the stock. A large upper shadow indicates that the stock could not sustain its probe into new high ground. A potential reversal has been signaled.

-On the third day, a candle with a black real body emerges. This candle retreats substantially into the real body of the first day. The pattern is made more powerful if there is a gap between the second and third day's candles.

-However, this gap is unusual, particularly when it comes to equity trading. As such, it is not a required part of the pattern. The further this third candle retreats into the real body of the first day's candle, the more powerful the reversal signal. Since the third day affirms the star's potentially bearish implications, no further confirmation is needed.

-Having explored the evening star in detail, we need say little more about the morning star formation since it is the exact opposite of the evening star. It occurs in a downtrend and starts with a large black candle.

-On the second day, a star forms on a gap. The third day completes the reversal by closing well into the real body of day one.

TECHNICAL ANALYSIS CHART (PART 11 : SIGNAL FOR TREND CHANGE

THE FOUR DOJIS SHOW STOCKS THAT HAVE STALLED )

-If you were to ask me which of all the candlesticks is the most important to recognize, I would answer unhesitatingly – the doji.

-On a daily chart, the doji often marks the beginning of a minor or intermediate trend reversal. Fail to recognize the doji's implications and you run the risk of buying at the top or staying far too late in a trade and leaving substantial profits on the table.

-There are four types of dojis -- common, long-legged, dragonfly and gravestone. All dojis are marked by the fact that prices opened and closed at the same level. If prices close very close to the same level (so that no real body is visible or the real body is very small), then that candle can be interpreted as a doji.

-After a long uptrend, the appearance of a doji can be an ominous warning sign that the trend has peaked or is close to peaking. A doji represents an equilibrium between supply and demand, a tug of war that neither the bulls nor bears are winning.

-In the case of an uptrend, the bulls have by definition won previous battles since prices have moved higher. Now, the outcome of the latest skirmish is in doubt. After a long downtrend, the opposite is true. The bears have been victorious in previous battles, forcing prices down. Now the bulls have found courage to buy and the tide may be ready to turn.

-What I call a "common" doji has a relatively small trading range. It reflects indecision.

Here's an example of a common doji:

-A "long-legged" doji is a far more dramatic candle. It says that prices moved far higher on the day, but then profit taking kicked in. Typically, a very large upper shadow is left. A close below the midpoint of the candle shows a lot of weakness.

Here's an example of a long-legged doji:

-When the long-legged doji occurs outside an upper Bollinger band after a sustained uptrend, my experience says you should be extremely vigilant for the possibility of a reversal.

-A subsequent sell signal given by an indicator such as stochastics is typically a very reliable warning that a correction will occur.

-A "gravestone doji," as the name implies, is probably the most ominous candle of all. On that day, prices rallied, but could not stand the "altitude" they achieved. By the end of the day they came back and closed at the same level.

Here's an example of a gravestone doji:

-Finally, a "dragonfly" doji depicts a day on which prices opened at a high, sold off, and then returned to the opening price. In my experience, dragonflies are fairly infrequent. When they do occur, however, they often resolve bullishly (provided the stock is not already overbought as shown by Bollinger bands and indicators such as stochastics).

Here's an example of a dragonfly doji:

-When assessing a doji, always take careful notice of where the doji occurs. If the security you're examining is still in the earlystages of an uptrend or downtrend, then it is unlikely that the doji will mark a top.

-If you notice a short-term bullish moving average crossover, such as the four-day moving average heading above the nine-day, then it is likely that the doji marks a pause, and not a peak.

-Similarly, if the doji occurs in the middle of a Bollinger band, then it is likely to signify a pause rather than a reversal of the trend.

-As significant as the doji is, one should not take action on the doji alone. Always wait for the next candlestick to take trading action. That does not necessarily mean, however, that youneed to wait the entire next day.

-A large gap down, after a doji that climaxed a sustained uptrend, should normally provide a safe shorting opportunity. The best entry time for a short trade would be early in the day after the doji.

TECHNICAL ANALYSIS CHART (PART 12 : TWEEZERS CAN HELP YOU PULL PROFITS OUT OF THE MARKET )

-In my experience, "tweezers" candles do not occur all that often in the stock market. However, when they do indeed take place, they are almost always significant.

What are tweezers candles?

-Candlestick theory recognizes both a tweezers top and a tweezers bottom. The tweezers formation always involves two candles. At a tweezers top, the high price of two nearby sessions is identical or very nearly so.

-In a high priced stock there may be a few cents variation and I believe it should still be considered a tweezers. At a tweezers bottom the low price of two sessions that come in close succession is the same.

-For simplicity, let's talk just about the tweezers bottom. In some instances, the tweezers bottom is formed by two real candlestick bodies that make an identical low. In other instances, the lower shadows of two nearby candles touch the same price level and the stock then bounces higher.

-A third possibility is that the lower shadow of one day and the real body of a nearby session hit the same bottom level. Most traders are familiar with a double bottom or double top.

-For this formation to occur, the chart you're looking at should generally show at least fifteen trading days between the two tops or bottoms. The double top or bottom is typically a forecasting formation that applies to Intermediate-term reversals.

-In my mind, the tweezers pattern is analogous to a very short-term double top or double bottom. What the tweezerscandles say is that prices held twice at the exact same level or very close to it. At the bottom, sellers were not able to push the stock lower. At the top, the bulls were not able to drive prices higher. Tweezers thus signify very short-term support and resistance levels.

Tweezers sometimes occur on two consecutive trading sessions. In these cases they are relatively easy to spot. However, they can also occur several sessions apart -- say six or eight. (If they are spread further apart than that, then the formation is beginning to approach the double bottom or
top described above.) When the tweezers occur consecutively their forecasting value generally increases.

Why? Well, in these cases a bullish or bearish move has been absolutely stopped in its tracks and is more likely to reverse. As with any candles, swing traders should carefully watch the price action that occurs immediately after the tweezers candles. If the tweezers bottom is to be a meaningful reversal, then the low formed by the two candles should hold. If the bottom is penetrated, then prices are likely to descend to at least the next important support level. The
opposite is true for a tweezers top.

GAPS FROM A JAPANESE CANDLESTICK VIEWPOINT
A gap is a 'hole" in the chart. It occurs because on a particular day a stock opens or closes much higher or lower than on the previous session. The cause of a gap can be varied. Some common reasons for gaps are earnings announcements, important corporate news or even large moves in the overall market at the opening of trading.

CANDLESTICK THEORY ON GAPS
Candlestick theory, while less detailed about gaps, provides some important additional insights. Japanese theory does not distinguish between the types of gaps. Nor does it even use this term. Instead a gap is called a "window."

Whereas a great deal of emphasis in candlesticks is given to reversal patterns, a window is considered a continuation pattern. In other words, trading is highly probable to continue in the same direction after the window as it did before it.
In his work on candlesticks, Steve Nison advises traders that they should typically trade "in the direction of the window." If a particular stock is declining when the window" occurs, then it is highly probable that the decline will continue. If the stock is rising when the window occurs, then it should continue to rally.
Once a window has occurred, it becomes an important support and resistance area. If the indow occurred in a downtrend, then on any subsequent rally the upper end of the window should turn back prices. If the window was created in an uptrend, then when prices rally the bottom edge of the window should be the lowest point of decline. Further candle theory holds that the test of all open windows is likely. The key thing to examine is what happens on this test.

When the alert swing trader spots a window in a rising trend, he or she should expect, for a time, that the price will continue higher. Eventually, however, prices will reverse and will test the open window. On this test, prices should hold at the lower edge of the window, which is now important support. If, however, this support level is violated and selling pressure persists, then it is likely that the trend has reversed. The swing trader should now go short in the same way he or she would if a horizontal support level had been breached.
In a downtrend, the opposite is true. After the initial window, the decline should continue. Eventually resistance, which is at the upper edge of the window, should be tested. If buying pressure persists and is able to move prices beyond this upper window, then the swing trader should go long in the same way they would if a resistance level were overcome.

TECHNICAL ANALYSIS CHART (PART 13 : THREE ADVANCING WHITE SOLDIERS è HELP YOU FIGHT FOR PROFITS )

-The bullish counterpart of three black crows is known as "three white soldiers" and is considered by some candle theorists as one of the most bullish candle patterns.

-The three white soldiers pattern is most potent when it occurs after an extended decline and a period of subsequent consolidation. When a particular stock posts a decline followed by a sideways movement, the appearance at that point of three white soldiers signals that higher prices are likely ahead.

-The first of the three advancing white soldiers is a reversal candle. It either ends a downtrend or signifies that the stock is moving out of a period of consolidation after a decline.

-The candle on day two may open within the real body of day one. The pattern is valid as long as the candle of day two opens in the upper half of day one's range. By the end of day two, the stock should close near its high, leaving a very small or non-existent upper shadow. The same pattern is then repeated on day three.

-Although this candle pattern is very potent when a stock is at or near its lows, it should be regarded skeptically if it appears following a long advance in price. If you spot three white soldiers after a sustained rally, then it may mean a top is near.

-Be on the alert then for a reversal candle such as a doji or negative engulfing.

-The "three white soldiers" pattern does not occur frequently, but if you are a swing trader you should definitely be on the lookout for it. These soldiers make great allies in your battle for swing trading profits.

TECHNICAL ANALYSIS CHART ( PART 14 : THE INVERTED HAMMER INDICATES THE SHORTS MAY BE READY TO COVER )

-Below you will find an illustration of the "inverted hammer" candlestick:

-The reason that the inverted hammer looks so familiar is that it is identical in appearance to the shooting star discussed above. The difference is that the shooting star occurs at the end of a long uptrend. The inverted hammer, on the other hand, occurs after a significant decline has taken place.

-If you examine the inverted hammer carefully, it hardly looks like a bullish candle. Prices opened low and then rallied strongly. By the close of trading, however, the stock has given back almost all of the day's gains. That leaves a small real body and a very large upper shadow.

-If anything, the candle looks bearish. The bulls could not sustain a rally, so the bears took the stock back toward its lows for the day.

-So, why should this candle potentially set up an important reversal? My theory is that the inverted hammer often is a signal that shorts are beginning to cover their positions.

-Since the inverted hammer can only occur after a sustained downtrend, the stock is in all probability already oversold. Therefore, the inverted hammer may signify that shorts are beginning to cover.

-In addition, traders who have held long positions in the security, most of whom are now showing large losses, are often quick to dump their shares by selling into strength.

-This will also serve to drive the stock back down. With this candle, it is imperative to watch the next day's trading action. If the stock opens strongly and remains strong during the day, then a key reversal is likely in progress.

-Not every inverted hammer will tune you in to this kind of short-covering situation. However, when you do see its appearance on a chart, then I suggest you do two things.

-First, check the short interest in the stock. Second, if thatshort interest is substantial, then follow the stock closely the next trading day. Recognition of the inverted hammer may help you build market-beating profits.

TECHNICAL ANALYSIS CHART (PART 15 : THE OMINOUS CALL OF THREE BLACK CROWS )

-The three black crows candle formation does not happen very frequently in stock trading, but when it does occur swing traders should be very alert to the crow's caw.

-The candlestick's metaphor is three crows sitting in a tall three. On the day the first black crow makes its appearance,the formation is most predictive if the first "crow" -- or dark candlestick -- closes below the previous candle's real body.

-Two more long-bodied consecutive down days then ensue. On each of these days, it appears as if the stock wants to regain its former strength, as the stock opens higher than the close on the previous day.

-By the end of each session,however, the sellers regain control and the stock drops to a new closing low.

Here is what three black crows candlestick pattern looks like:

-Note that the lower shadows on three black crows are small, or in some cases even nonexistent. Although three black crows is a complete pattern in and of itself, traders should always be alert to what happens on the fourth day after thepattern is formed.

-Since there has been intense selling throughout the pattern, the stock may be overextended to the downside. However, if the stock continues its negative pattern on the fourth day, then it is likely that the issue is going much lower.

-Three black crows is an infrequent, but powerful candle formation. After observing its occurrence, the trader should likely resist the temptation to short since the issue is already short-term oversold.

-Rather, in most cases, the better approach is to watch the stock carefully. If it rallies weakly and then begins to falter, a short position can in most cases safely be initiated with a stop just above the high of the first black crow.