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Candlestick Charting

Essentials and Beyond

Spotting the Early Reversal Signals

Steve Nison, CMTPresident: Candlecharts.com

Web site: www. candlecharts.comE-mail: nison@candlecharts.comTelephone: 732.254.8660

““Japan's Candlesticks Light Traders' PathJapan's Candlesticks Light Traders' Path””-- Wall Street Journal Wall Street Journal

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Candlesticks in the NewsCandlesticks in the News

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Construction of candle linesConstruction of candle linesIndividual candle linesIndividual candle linesCandle patternsCandle patternsThe Best of the East and West The Best of the East and West Money ManagementMoney ManagementPractice ChartsPractice ChartsNison Trading PrinciplesNison Trading Principles

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openopen closeclose

openopen

Real Body

Shadow

Real Bodies / Shadows Doji

Constructing the Candlestick Line

closeclose

session open high low close1 23 26 21 25

2 26 28 23 27

3 23 27 22 224 25 28 22 25

5 27 27 25 25

Drawing Candle Lines

242526

1 2 3 4 5

session open high low close1 23 26 21 25

2 26 28 23 27

3 23 27 22 224 25 28 22 25

5 27 27 25 25

Drawing Candle Lines

242526

1 2 3 4 5

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Bulls vs. BearsBulls vs. Bears

Who’s in control?

The Real Body is the Essence of the Price Movement

Small Real BodiesSmall Real Bodies(spinning tops)

Prior trend is losing force

Implication

Small real body – color not important

Criteria

6 13 20 28 3June

37.837.938.038.138.238.338.438.538.638.738.838.939.039.139.239.339.439.539.639.739.839.940.040.140.240.340.440.540.640.740.840.9

NORTH FORK BANCOn this bar chart, in the circled zone the market looks healthy as it makes mostly higher highs and is maintaining the highs. As such, no appears reason for concern.

What is the bar chart saying?What is the bar chart saying?

6 13 20 28 3June

37.837.938.038.138.238.338.438.538.638.738.838.939.039.139.239.339.439.539.639.739.839.940.040.140.240.340.440.540.640.740.840.9

NORTH FORK BANCThis is the same chart, but with candles. Note how the small real bodies hint that the bulls have lost control. As such, by using the insights of the candles, we see there is a reason for concern.

What is the candlestick chart saying?What is the candlestick chart saying?

WhoWho’’s in control s in control during this ascent?during this ascent?

What is this What is this candle line candle line hinting?hinting?

Spinning TopSpinning Top

Bears’losing force

Spinning TopsSpinning Tops

Criteria: Open and close are the same

Implication: Market is “tired”

DojiDoji

The red arrows show the bulls have complete control. The doji alters the trend.

Spinning top

Because the candlestick chart uses the same data as a bar chart (open, high, low and close), all bar charting techniques can be used on a candlestick chart.

Nison Trading Principle

Candles shine at preserving capitalCandles shine at preserving capital

A tall white candle pierces resistance in early March. The doji next session hinted the bulls had lost full of the market (note: it does not mean that the bears has taken control).

Doji Confirms Resistance Doji Confirms Resistance

No reversal signals yet

How about now?

Candlesticks do not give price targets.

Candles and Price TargetsCandles and Price Targets

This doji takes on extra significance because it confirms a resistance level

When not to use dojiWhen not to use doji

11 18 25 1April

8 1521.5

27.5OMNICARE INC

This stock has so many doji that they have little market implication

Spinning tops and dojiSpinning tops and doji

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Spinning top and dojiSpinning top and doji

If a spinning top is small enough we can view it as a doji

Small Real Body as a dojiSmall Real Body as a doji

Northern doji call market tops better than southern doji call bottoms.

Northern and Southern DojiNorthern and Southern Doji

A doji in an uptrend is a “Northern Doji”

A doji in a downtrend is a Southern Doji”

Northern and Southern DojiNorthern and Southern Doji

Northern

Southern

Candles in ContextCandles in Context

Southern doji, but why would you pay attention to it?

Doji in box rangeDoji in box range

There is no trend to reverse with this doji– thus we ignore it.

Trading Tactics Trading Tactics -- DojiDojiAnalyze these doji in the context of what happened before. Are any of

these a more likely reversal and why?

A B CQuestion

Question

15 22 29 5August

12 19 26 3September

9 16 23

20.5HEIDRICK STRUGG

Question

Doji Overview Doji Overview –– Analyze Each Doji in Context of TrendAnalyze Each Doji in Context of Trend

Shadows

Remember: location and size of the shadow should be considered when analyzing the market psychology.

Implication: Bearish long upper shadow offsets “rallying strength.” Bullish long lower shadows hints bears losing force.

Bullish shadows confirming supportBullish shadows confirming support

Long lower shadows confirm support Long lower shadows confirm support

On this 5 minute chart this group of long upper shadows confirming that the bulls’ drive is stalling at the prior pivot high

Resistance

Bearish shadowsBearish shadows

Bearish ShadowsBearish Shadows

Convergence of Bullish ShadowsConvergence of Bullish Shadows

8 22eptember

29 13October

27 10 24November

1 15December

29 122001

19 2 16February

23 9March

16 30 13April

20 4May

18 1June

15 29 13July

20 3 17August

24 7 21September

910111213141516171819202122232425262728293031323334353637383940414243444546474849PACIFICARE HLTH (15.0500, 16.5400, 14.8600, 16.1200, +1.11000)

Bearish Shadows as resistanceBearish Shadows as resistance

A market “rising in agony”

Hammer

black or whiteCriteria:• Small real body at, or near top, of range• Lower shadow at least 2x real body• Market in down trend

Implication: ‘Groping for a bottom”

HammerHammer

Hammer as supportHammer as support

It is common for the market to retest a hammer. This will help expand on a base.

Will often retest lower

shadow

Hammer and failure to hold new lowsHammer and failure to hold new lows

Failure to hold new lowsFailure to hold new lows

SnapSnap

Crack and SnapCrack and Snap

CrackCrack

Target

StopBuy

Hammer and Crack/SnapHammer and Crack/Snap

Hammer and failure to hold new lows46

Crack and Snap on more than one sessionCrack and Snap on more than one session

11 12 15 16 17 18 19 22 23 24 25 26 29 30 31 1 2August

5 6 7 8 9 12 13 14

10.911.011.111.211.311.411.511.611.711.811.912.012.112.212.312.412.512.612.712.812.913.013.113.213.313.413.513.613.713.813.914.014.114.214.314.414.514.614.714.814.915.015.115.215.3

CISCO SYSTEMS

Support area shown at arrowsCracked support

On this session the bulls have regained control

Target area

Crack/Snap with more than one sessionCrack/Snap with more than one session

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The more signals - either candles or Western or a combination of both – converge at the same level, the more likely a reversal

Hammer confirms support Hammer confirms support

Hammer and bullish shadows

Hammer confirming supportHammer confirming support

Hammer confirmed support area

Here the hammer confirms supportHere the hammer confirms support

Hammer as supportHammer as support

Spinning tops reflect bulls’ strength waning

A close under the lows of the hammer would void hammer's bullish forecast

HammersHammers

14 22 28March

6 13 20 2742.543.043.544.044.545.045.546.046.547.047.548.048.549.049.550.050.551.051.552.052.553.053.554.054.555.055.556.056.557.057.558.058.559.059.560.0

WAL-MART STORES

Of candle lines A through E which are hammers and why?

Question

Even a “perfect” candle signal does not equal a good trade!

YOU MUST ALWAYS JUDGE THE POTENTIAL TRADE’S

RISK-REWARD

Hammer as SupportHammer as Support

Closed under hammer

supportsupport

hammer

Risk/RewardRisk/Reward

If you buy on the hammer’s close ask “What is my stop and what is my target”?

Risk/rewardRisk/reward

Hammer confirmed on closeHammer confirmed on close

Reward

RiskRisk

Which three prices of the session are on the high?

What happened during the session, by session’s end?

Dragonfly Doji

Dragonfly dojiDragonfly doji

Shooting Star

black or white

Criteria:• Small real body at, or near bottom, of range• Upper shadow at least 2x real body• Market in an up trend

Implication: ‘Signaling Trouble Overhead”

Shooting Star / HammerShooting Star / Hammer

Hammer Hammer

Shooting StarShooting Star

Shooting StarsShooting Stars

Dual Shooting StarsDual Shooting Stars

Shooting stars at Shooting stars at arrows at arrows at resistance area resistance area shows the market shows the market is rejecting those is rejecting those higher levelshigher levels

Shooting Star as resistanceShooting Star as resistance

Shooting Star

Doji confirms shooting star’s resistance

How NOT to use candlesticks How NOT to use candlesticks

Oh my goodness! The market rallied after the shooting star!

Which three prices of the session are on the low?

What happened during the session, by session’s end?

Gravestone Doji

Gravestone DojiGravestone Doji

Gravestone reinforces resistanceGravestone reinforces resistance

No reversal signalsNo reversal signals

Gravestone dojiGravestone doji

15 22 29May

6 13 20 28 3June

33.099 CENTS STORES

The small The small gravestone doji gravestone doji was the first sign was the first sign of troubleof trouble

Shooting star and failure to maintain new highsShooting star and failure to maintain new highs

Shooting star and failure to hold new highs

SnapSnap

Crack and SnapCrack and Snap

CrackCrack

Target

StopBuy

SellSell

Falling off the RoofFalling off the Roof

Target

Falling Off the Roof on one sessionFalling Off the Roof on one session

Makes new Makes new high, then falls high, then falls to hold itto hold it

Falling Off the Roof more than one sessionFalling Off the Roof more than one session

breakout

Falling off the roof

Hammer and Hanging Man Lines

Hammer

Hanging Man

bottom reversal

top reversal

white or black

The difference between these is the preceding trend

Hanging Man

Hammer

Hammer and Hanging Man Hammer and Hanging Man

““If it appears from below, If it appears from below, buy. If it appears from buy. If it appears from above then sell.above then sell.””

Hanging ManHanging Man-- confirmedconfirmedThe close the session after the hanging man confirmed its potential bearish implications

The stock went from higher highs to the same highs. This in combination with the hanging man (which was confirmed) sent out warning signals.

Hanging ManHanging Man

Long White Real Body As Support

1st support

2nd support

Long Black Real Body as Resistance

2nd resistance

1st resistance

Center of Long White Candle as Support Center of Long White Candle as Support

Using Tall White Real BodiesUsing Tall White Real Bodies

Center long black real bodyCenter long black real bodyS&P

middle long black real body

Middle of Long Black Real BodyMiddle of Long Black Real Body

Using Single Candlestick LinesUsing Single Candlestick Lines

Shrinking real bodies hint bears’ losing momentum. Tall white then shows bulls’ take control. What else also hints bear’s losing force here?

Using the Size of Real Bodies to Gauge ForceUsing the Size of Real Bodies to Gauge Force

The shrinking size of the real bodies hint the bulls are losing force

Convergence of Candles Define SupportConvergence of Candles Define Support

12 3 4

Engulfing PatternsEngulfing Patterns

BearishBearishEngulfing Engulfing PatternPattern

BullishBullishEngulfingEngulfingPatternPattern

Criteria:• Black real body wraps around preceding white real body• Market in up trend

Implication: ‘Bulls have been constrained”

Criteria:• White real body wraps around preceding black real body• Market in down trend

•Implication: Market bottoming out

Convergence of signals reinforce support Convergence of signals reinforce support

Two hammers reinforce support areaTwo hammers reinforce support area Bullish engulfing pattern further underscores support

Crack and Snap and Bullish Engulfing Pattern Crack and Snap and Bullish Engulfing Pattern

Support zone

Bullish engulfing pattern as extra confirmation

Snaps back over broken support

Bullish engulfing pattern as support Bullish engulfing pattern as support

16 23 30October

7 14 21

7.47.57.67.77.87.98.08.18.28.38.48.58.68.78.88.99.09.19.29.39.49.59.69.79.89.9

10.010.110.210.3ORACLE

One of most powerful aspects of the bullish engulfing pattern is their use as support.

Bullish engulfing pattern confirms supportBullish engulfing pattern confirms support

Shooting Star and bearish engulfing pattern Shooting Star and bearish engulfing pattern

Shooting StarBearish engulfing Bearish engulfing pattern confirms pattern confirms resistance set by resistance set by shooting star shooting star

Bearish Engulfing Pattern as ResistanceBearish Engulfing Pattern as Resistance

Bearish engulfing pattern Bearish engulfing pattern Before this bearish engulfing pattern the doji and shooting stars proved bull’s advance was being curbed

Bearish engulfing pattern confirming resistanceBearish engulfing pattern confirming resistance

Bearish Engulfing Pattern as ResistanceBearish Engulfing Pattern as Resistance

Bearish Engulfing Bearish Engulfing Pattern 1Pattern 1

Bearish Engulfing Bearish Engulfing Pattern 2Pattern 2

Bearish Engulfing Pattern compared to Outside ReversalBearish Engulfing Pattern compared to Outside Reversal

Hammer Hammer

Bearish Bearish Engulfing Engulfing PatternPattern

Outside Outside reversalreversal

Trading Tactics Trading Tactics -- Bullish Engulfing PatternBullish Engulfing Pattern1) Highlight the bullish engulfing

pattern

2) What was the low of the pattern and at what price was it completed?

3) Assuming a resistance area in mid-late Dec. at the long upper shadows would you buy on this bullish engulfing pattern?

4) What is the principle that this example highlights?

Question

Dark Cloud CoverDark Cloud CoverCriteria:• Opens above prior high (or close) • Closes as long black real body• Close well into prior long white candle • Market moving north

Implication: “Advance is exhausting itself”

Dark Cloud CoverDark Cloud Cover

Bulls have been constrained

Dark Cloud Cover as ResistanceDark Cloud Cover as Resistance

Dark cloud cover reinforces zone of resistance

Dark Cloud CoverDark Cloud Cover

Dark Cloud Cover with confirmationDark Cloud Cover with confirmation

Since this black candle didn’t get more than halfway into the white real body, we can wait for confirmation the next session

Dark Cloud Cover and Risk/RewardDark Cloud Cover and Risk/Reward

PatternCompleted

Convergence of cluesConvergence of clues

This dark cloud cover as resistance

Bearish engulfing pattern

Piercing Pattern

Criteria:• Market moving south• Opens below prior low (or close) • Closes as long white real body• Close more than halfway into prior black candle

Implication: “hint that the decline is exhausting itself”

Piercing PatternPiercing Pattern

Piercing pattern Piercing pattern

Not a piercing pattern

Piercing Patterns and confluencePiercing Patterns and confluence

1 and 3 are Piercing Patterns

2 is a bullish engulfing pattern

Piercing PatternPiercing Pattern

Piercing Pattern

confirmed support

Piercing Pattern and Negative SelectionPiercing Pattern and Negative Selection

HaramiHarami

white or black

Criteria:• First candle is unusually long• Second real body within prior real body• Second real body can be black or white

Implication: ‘Change in flow of market”

Bearish

Bullish112

Harami

Not a harami pattern

Bearish HaramiBearish Harami

22 29August

5 12 19 26 3September

66.066.567.067.568.068.569.069.570.070.571.071.572.072.573.073.574.074.575.075.576.076.577.077.578.078.579.079.580.080.581.081.582.082.583.0IBM

Support defined by a bullish engulfing pattern

Harami

Bearish harami confirms resistanceBearish harami confirms resistance

BullsBulls’’ in control in control but at resistancebut at resistance

Harami confirms Harami confirms bullsbulls’’ drive is stalling drive is stalling at resistance at resistance

Bullish Harami Bullish Harami

Harami Pattern

Bearish engulfing pattern

Practice ChartPractice Chart

On this intraday chart detail the reversals at 1,2,3 and 4. What was a resistance area at 5 (hint— for 5 look at long black candle)

Question

Morning StarMorning Star

white or black

Criteria:Criteria:•• Market in down trend Market in down trend ••First candle long blackFirst candle long black•• Second real body (spinning top, Second real body (spinning top, black or white) doesnblack or white) doesn’’t overlap first t overlap first sessionsession’’s real bodys real body•• Third candle (white) closes deeply Third candle (white) closes deeply in first black real body in first black real body

Implication: Bulls are taking controlImplication: Bulls are taking control

While the ideal morning star has none of the real bodies touching, we could still view it as a morning star even if the last two real bodies overlap slightly– as is the case here.

Morning StarsMorning Stars

Morning Star Morning Star

Morning Star

Support areaPiercing Pattern

Doji show market is “tired”

Morning Star as SupportMorning Star as Support

The doji should not be used to sell since the market had just given a bottom reversal signal and was not overextended

Evening StarEvening Starwhite or black

Criteria:• Market in an up trend •First candle is long white • Second real body (black or white spinning top) doesn’t overlap first session’s real body• Third candle (black) closes deeply in first white real body

Implication: Bears are taking control

Evening Star as Resistance Evening Star as Resistance

Evening Star and Risk/ RewardEvening Star and Risk/ Reward

24 1July

8 15 22 29 5August

12 19 26 3 9September

HEIDRICK STRUGG

Evening Star completed here. This is likely a poor risk/reward for a short sale.

This doji confirms the resistance area set by the evening star and as such may offer a better r/r.

Evening StarEvening Star

Evening Star

Morning Star

Would you buy here?

How about here?

Entering and Exiting

1) What pattern is A,B,C?

2) When would you sell short and why

3) What is your stop, target?

Question

WindowsWindows

RisingWindow

Falling Window

Go in the direction of Go in the direction of the windowthe window

Corrections stop at Corrections stop at the windowthe window

WindowsWindows

A rising window is A rising window is supportsupport

Corrections stop at the windowCorrections stop at the window

Support Support ZoneZone

Rising WindowsRising Windows

Rising windowRising window

WindowWindow’’s zone of supports zone of support

Large rising windowLarge rising window

Bottom of rising window as the major support

A falling window is A falling window is resistanceresistance

Corrections stop at the windowCorrections stop at the window

Resistance Resistance ZoneZone

Falling window with extra confirmationFalling window with extra confirmation

The The spinning spinning

tops helped tops helped confirm the confirm the importance importance

of the of the falling falling

windowwindow’’s s resistanceresistance

Falling Falling windowwindow

Large Falling WindowLarge Falling Window

The top of The top of the falling the falling window is window is the major the major resistanceresistance

Closed under the windowClosed under the window’’s support s support

Breaks the rising Breaks the rising windowwindow‘‘s s

support areasupport area

Confluence of CandlesConfluence of Candles

1) Why did the market stall at area A?2) Why did it rally from area B?3) What two reasons did the market fail at C?

Question

Negative SelectionNegative Selection

27 30 1 2October

3 4 7 8 9 10 11 14 15 16 17 18 21 22 23 24 25 28 29 30

PHILIP MORRIS

Rising window

In spite of this bearish session and the failure at resistance (at dotted line) would you sell?

Trading Tactics – practice

1. What pattern is highlighted?

2. When would you sell short based on this pattern? Hint-there are two times to sell short

Question

Candlecharts.comWestern ToolsWestern Tools

Optimizes and confirmsOptimizes and confirms

Price targetsPrice targets

Widely FollowedWidely Followed

Technicals and unexpected newsTechnicals and unexpected newsBullish surprise and the rally stopped at resistance

Bearish news and the market stabilized at support

East and WestEast and West

These dual hammers were extra significant since they also confirmed a support level

1) Who1) Who’’s in control s in control during this ascent?during this ascent?

2) What is this 2) What is this candle line candle line hinting?hinting?

For Bull Flag pattern take height of move before the consolidation and add that to the bottom of the box range

Doji as signal to exit

Western TA/Candles for targetsWestern TA/Candles for targets

5November

12 19 26 3December

10 17 24 312002

25.0UNIBANCO GDR (20.9000, 21.4600, 20.7000, 21.4000, +0.55000)

B) Sell short at bearish engulfing pattern’s resistance level with a target to Harami

Harami

A) Buy at Harami with target to resistance at bearish engulfing pattern

Bearish Engulfing Pattern

Change of PolarityChange of Polarity

SupportSupportSupportSupport

Resistance

ResistanceResistance

This old resistance

Turns into new

support

Resistance converts into new supportResistance converts into new support

Candle signals must be evaluated and acted upon within the market’s context

Doji and Shooting Star

hammerhammer

hammer

dojidojiShooting starShooting star

Prior Prior resistance resistance becomes becomes new new supportsupport

Change of Polarity Change of Polarity

support support

Resistance

Volume Confirms SignalVolume Confirms Signal

High Volume Hammer

VolumeVolume

Blue arrows hint at selling climax sessions, but needed higher close to confirm. Got this with a hammer.

Note high volume window

Subjectivity and Volume Subjectivity and Volume

Rising window

When window’s support was pierced so slightly (5 cents) we could wait for next opening to confirm – especially with such a high volume window (which is often solid support).

High Volume Falling WindowHigh Volume Falling Window

8 15 22 29May

6 13 20 28 3June

40005000600070008000

Volume

45.5AMER EXPRESS CO

The volume spike on the falling window increases the significance of this resistance

Importance of VolumeImportance of Volume

Higher volume on white candle compared to black on this bullish engulfing pattern magnifies the likelihood of a reversal

High Volume DojiHigh Volume Doji

This high volume “long-legged” doji shows that as hard as the bulls try to push the market, the bears have enough force to absorb this demand.

Candles and VolumeCandles and Volume

Volume ConfirmationVolume Confirmation

The arrow points to a “Snap and Crack”. What does volume do to increase or decrease the likelihood of this technique working?

Trading Tactics Trading Tactics -- East and WestEast and WestAt the arrow we see a doji.

1) What is the volume on this doji telling us about the supply/demand situation?2) What 2 candlestick signals in August (at A) give clues that there was support at the doji?3) Although the doji was holding a support area, what happened on the day of the doji that

would keep the short term trend down? Based on this, what would we need to see to give bullish confirmation of that support area? Q

uestionQ

uestionask@candlecharts.com 732.254.8660 USA

Simple Moving Average

Formula: Add price (usually close) for N periods/ N periods

Example: 20 day moving average of close: add total of last 20 day’s closing prices and divide by 20.

Example of 5 day m.a.

Sept. 26-30125/5=$25

$32Sept. 30

Sept.25-29116/5=$23.20

$29Sept. 29

Sept. 24-28107/5=$21.40

$22Sept. 28$21Sept. 27$21Sept. 26$23Sept. 25$20Sept. 24

Last 5 days/5= 5 day m.a.Closing PriceDate

Moving Averages Moving Averages –– the shorter the more it the shorter the more it ““hugshugs”” pricesprices

30 day

50 day

Moving Average as Support/ResistanceMoving Average as Support/Resistance

Spinning top help confirm support at this moving average

Candles in Context Candles in Context –– Moving AveragesMoving Averages

Bollinger BandsBollinger Bands

5 12November

19 26 3 10December

17 24 31 72002

14 22 28 4 11February

19 25 4March

11 18 25 1April

8 15 22 29 6May

13 20 2738.0

48.5COSTCO WHOLESAL

Hammer Hammer –– slide 1 of 2slide 1 of 2

Hammer is a plus

East and West East and West –– slide 2 of 2slide 2 of 2

Hammer at bottom end of Bollinger Band is even better!

The East The East

= spinning tops= spinning tops

The East and the WestThe East and the West

This evening star pattern emerged at the top end of the Bollinger Band resistance

Subjectivity and Candle ChartsSubjectivity and Candle Charts

11 18 25 1April

8 15 22 29May

6 13 20 28

112OIL SERVICEThe ideal shooting star has little, or

no, lower shadow. In this example is the lower shadow too long? Viewing this signal within context of top end of BB we can view it as significant as an “ideal” shooting star

OscillatorsOscillators

Oscillators Oscillators

Separate from priceSeparate from price

Best in lateral marketsBest in lateral markets

Includes Includes stochasticsstochastics, MACD, , MACD,

RSI, price oscillator, etc.RSI, price oscillator, etc.

ApplicationsApplications

Momentum: Momentum: force of trendforce of trend

Overbought/Oversold:Overbought/Oversold:

DivergenceDivergence

too far too fast?too far too fast?

Positive DivergencePositive Divergence Negative DivergenceNegative Divergence

PricePrice

OscillatorOscillator

PricePrice

DivergenceDivergence

Price OscillatorFormula:

short term moving average – long term moving average

Example: 10 day moving average = $23 30 day moving average = $31

Price oscillator = $23-$31= -8 If 10 and 30 day moving averages are the same Price Oscillator = 0

Bearish DivergenceBearish Divergence

29 30 1May

2 3 6 7 8 9 10 13 14 15 16 17 20 21 22 23 24 28 29 30 31 3June

4 5 6 7

2Price Oscillator

35.0MOBILE TELESYS ADR

Bearish divergence with candle confirmationBearish divergence with candle confirmation

29 30 1May

2 3 6 7 8 9 10 13 14 15 16 17 20 21 22 23 24 28 29 30 31 3June

4 5 6 7

2Price Oscillator

35.0MOBILE TELESYS ADRDoji and shooting star warning of trouble overhead

Relative Strength Index

Formula: = 100 – (100/1+RS)

Where RS = average of N day’s up closesaverage of N day’s down closes

Example: If total up points (close to close) over 14 days was $28 and total down points for 14 days was $14:Average up = 28/14=$2 and Average down 14/14=$1.

So, RS= 2/1=2 and RSI = 100 – (100/1+2)=100-33.33 = 66.67%

Oscillators Oscillators –– Bearish DivergenceBearish Divergence

Bullish Divergence confirmed with candlesBullish Divergence confirmed with candles

Hammer and bullish divergence

Be careful about oscillators in strong trendsBe careful about oscillators in strong trends

StochasticsFormula for %K:

today’s close-lowest close in N periodshighest high in N periods-lowest low in N periods

Example: for 14 day %K, today’s close is 41, if highest high was 46 and lowest low was 38, for %K we have:%K = 41-38/46-38 *100= 37.5%

This means today’s close was 37.5% relative to the entire range of last 14 sessions.

Hammer and crossover with Hammer and crossover with stochasticsstochastics

Note how the hammer gave the reversal signal a day before the bullish crossover

Hammer

Bearish Crossover Bearish Crossover w/stochasticsw/stochastics confirmed by candlesconfirmed by candles

Bullish engulfing pattern and %K crossing under %D line from overbought reading in oscillator

OscillatorOscillator-- Stochastic with CandlesStochastic with Candles

East and West East and West

Oscillators Oscillators –– Bearish DivergenceBearish Divergence

Oversold?Oversold?-- slide 1 of 2slide 1 of 2

On this daily chart it looks

oversold

Oversold now? Oversold now? --slide 2 of 2slide 2 of 2

This intraday chart gives another perspective

Head and ShouldersHead and Shoulders

NecklineNeckline

Left ShoulderLeft ShoulderRightRightShoulderShoulder

HeadHead

Head and Shoulders Top

Sell signal

Three Buddha Pattern

neckline

Interview

Head and Shoulder top

Lows from dual bullish engulfing patternsLows from dual bullish engulfing patterns

TASC Magazine Interview TASC Magazine Interview -- Jan. 24, 2003 S&P at 860Jan. 24, 2003 S&P at 860

“… the heads and shoulders top on the S&P gives a target to the July-October bullish engulfing patterns near 775. A close over 870 would void this.”

Target zoneTarget zone

Hammer

Bloomberg TV Interview - July 28, 2003 S&P at 996

hammerhammer

Doji Doji Shooting star Shooting star

Prior Prior resistance resistance becomes new becomes new supportsupport

Interview

“Major support near 960. My upside target is 1160”

target

Prior Prior resistance resistance becomes new becomes new supportsupport

Target zone forecasted in July 03

Bearish Engulfing Pattern

Evening Star Interview

“ I am looking for major resistance at 1160 to 1175”

Bloomberg TV Interview – Jan. 26, 2004 S&P at 1140

Weekly Chart

““Falling off Falling off the roofthe roof””

Bearish Bearish Engulfing Engulfing PatternPattern

Interview

“ I am looking for major resistance at 1160 to 1175”

Bloomberg TV Interview – Jan. 26, 2004 S&P at 1140

Daily Chart

Price = Knowledge Price = Knowledge

Why Candlestick Charts?

Doji after Tall White Doji after Tall White

This doji takes on extra importance because it confirms market is stalling within a resistance zone

Risk Risk ManagementManagement

Outmaneuver Outmaneuver your your competitioncompetition

Early Reversal Signals Early Reversal Signals

Morning Star

Fosters ObjectivityFosters Objectivity

Although this market is Although this market is descending, the long descending, the long lower shadows offsets lower shadows offsets some of the negative some of the negative outlookoutlook

Long Lower (Bullish) ShadowsLong Lower (Bullish) Shadows

Insights into Insights into market psychology market psychology

Criteria: Open and close are the same

Implication: Market is “tired”

TimingTiming

25 day moving average

Close under m.a. support area but note how we got an earlier reversal with the gravestone

FMNA Bond PricesFMNA Bond PricesGravestone doji

Stay AliveStay Alive

New high close but ???New high close but ???

Doji is a warning!

PPrice = Knowledge rice = Knowledge RRisk Managementisk ManagementOOutmaneuver your competitionutmaneuver your competitionFFosters Objectivityosters ObjectivityIInsights into market psychology nsights into market psychology TTimingimingSStay alive tay alive

Seize trading opportunities before Seize trading opportunities before they become apparent to othersthey become apparent to others

Information is Power! Learn how to Information is Power! Learn how to avoid losing trades avoid losing trades

Pinpoint turning signals with razor Pinpoint turning signals with razor sharp accuracy sharp accuracy

Achieve PEAKTrading performance!

Interactive Session

Answers

Rally may just be starting

Market notoverextended

Resistance confirmed by doji

Analyze these doji in the context of what happened before. Are any of these a more likely reversal and why?

Trading Tactics Trading Tactics -- DojiDoji

Doji Overview Doji Overview –– Analyze Each Doji in Context of TrendAnalyze Each Doji in Context of Trend

15 22 29 5August

12 19 26 3September

9 16 23

20.5HEIDRICK STRUGG

1- Southern doji: downtrend should continue.2- In a “box” range: no trend to reverse.3- Southern doji: however it is confirming a support level and thus takes on more significance.4- Northern doji: rally running out of steam.5 - Southern doji- downtrend still in force6- Doji in a box range

HammersHammers

14 22 28March

6 13 20 2742.543.043.544.044.545.045.546.046.547.047.548.048.549.049.550.050.551.051.552.052.553.053.554.054.555.055.556.056.557.057.558.058.559.059.560.0

WAL-MART STORES

Which of these are hammers and why?

Only B was a hammer.

Lower shadow not long enough and C,D and E didn’t come after a downtrend

Trading Tactics Trading Tactics -- Bullish Engulfing PatternBullish Engulfing Pattern

1) Highlight the bullish engulfing pattern. - See 1

2) What was the low of the pattern and at what price was it completed? - 13 ½ and 17 ¾

3) Assuming a resistance area in mid-late Dec. at the long upper shadows would you buy on this bullish engulfing pattern? - No- it would be a bad risk/reward

4) What is the principle that this example highlights? - Not every candle signal should be a buy or sell.

Resistance Zone

Practice ChartPractice Chart

1 2 34

On this intraday chart detail the reversals at 1,2,3 and 4. What was a resistance area at 5 (hint—look at long

black candle)

1) bearish engulfing pattern2) shooting star3)harami4)bearish engulfing pattern5) center long black

1) When would you sell short, at A,B or C

Answer- At C. Not B because it is a new high close for move

2) Why

Answer- “Falling off the roof” and evening star. Because of falling off the roof can consider selling on open

3) What is your stop, target?

Answer- Stop is above high of B and target is low of move before late Oct. rally.

Target

Entering and Exiting

Confluence of CandlesConfluence of Candles

1) Falling window and two harami at A2) Bullish Engulfing Pattern at B3) Shooting Star at falling window at C

Trading Tactics – practice

1. What pattern is highlighted? Bearish engulfing pattern2. When would you sell short based on this pattern? Because of the rising window we would not sell on the completion of this pattern. As such we could sell on (a) the resistance at the highs of the bearish engulfing pattern, or (b) on a break under the windows support.

Rising window’s support

Potential selling levels

1) The high volume reflects heavy supply, but the doji proves that demand is strong enough to absorb this supply.

2) A hammer followed the next day by a bullish engulfing pattern. 3) While the high volume doji was a plus, that session also formed a falling window

and as such we needed a close over that window to turn more bullish.

Hammer and

Bullish Engulfing

Pattern

Window

Trading Tactics Trading Tactics -- East and WestEast and West

New tactics and New tactics and strategies revealed only strategies revealed only here!here!

Advanced Candle Charting Techniques

Geared to those familiar Geared to those familiar with candlestick basicswith candlestick basics

For more details about this For more details about this DVD Workshop visit DVD Workshop visit www.candlecharts.comwww.candlecharts.com

Steve will personally Steve will personally answer questions answer questions

without time limit on without time limit on any topic on this DVDany topic on this DVD

Secrets to Becoming a Samurai Trader Secrets to Becoming a Samurai Trader ––Advanced Candlestick Charting Advanced Candlestick Charting

New refinements and enhancements using doji, engulfing New refinements and enhancements using doji, engulfing patterns and many other signals for high success trading patterns and many other signals for high success trading with candle charts with candle charts See when to ignore a candle signalSee when to ignore a candle signalSpecial section on intraday trading including how to use Special section on intraday trading including how to use candles differently on intraday charts, using different time candles differently on intraday charts, using different time frames to increase trading success frames to increase trading success The Checkmate PrincipleThe Checkmate PrincipleUncover the one rule every candlestick trader ignores at Uncover the one rule every candlestick trader ignores at their own peril their own peril Learn the six principles every candlestick trader must Learn the six principles every candlestick trader must know know Uncloak new uses for the most potent candle pattern Uncloak new uses for the most potent candle pattern -- the the windowwindowInteractive practice sessionsInteractive practice sessionsEffective money management concepts to maximize the Effective money management concepts to maximize the effectiveness of candle charts effectiveness of candle charts

For details on SteveFor details on Steve’’s DVD s DVD Workshop Workshop Advanced Candlestick Advanced Candlestick Charting TechniquesCharting Techniques go to go to www.candlecharts.comwww.candlecharts.com

Sign up for SteveSign up for Steve’’s FREEs FREEbibi--weekly newsletter at weekly newsletter at www.candlecharts.comwww.candlecharts.com

IndexPage # Topic

1 – Introduction and Construction11 – Spinning Tops16 – Doji34 – Shadows 41 – Hammer, Crack and Snap and Dragonfly Doji60 – Shooting Star, Gravestone Doji and Falling off the Roof74 – Hanging Man79 – Center Long White/Long Black 88 – Engulfing Pattern100 –Dark Cloud Cover107– Piercing Pattern112 – Harami119 – Morning and Evening Stars132– Windows145– Candles and Western tools: confirmation, Change of Polarity, Volume, Moving Averages, and oscillators202 – Steve’s market forecasts207 – The PROFIT principle and Overview of day 2 session 221- Answers to Quiz and Interactive Charts

candlestick charting essentials and beyond › pdfs › day 1 dec 2004 to print.pdf · practice...

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