Download Candlestick Charts and more Lecture notes Financial Statement Analysis in PDF only on Docsity!
Candlestick Charts
Bullish Signals
Morning Star
This pattern is not a common one but probably the most dynamic. This is due to the fact that it is made up of 3 candles which shows, naturally, longer and clearly market sentiment. As you can see from the image shown, the classic setup for a Bullish Morning Star is, for the first candle, a strong move lower that maintains the underlying negative tone of the market. Prices then consolidate and the resulting candle shows little net movement – this can be minor gains, losses or, preferably, virtually no net movement. Often this hesitation is followed by a renewal of selling pressure and the overall tone of the market is intact, but when the 3 rd candle shows powerful buying interest –and gains must reverse more than half of the net losses – then the Morning Star pattern is confirmed. This is likely, when taken in context, to prove the catalyst for a complete change in the market's attitude to value.
Bullish Engulfing Pattern
Engulfing patterns (Bullish & Bearish) consist of 2 candles and also signals a complete change of direction. Here you can see a Bullish Engulfing pattern with the 1 st candle showing upside rejection and modest net losses but the 2nd^ candle shows a renewal of demand that, open to close, totally engulfs the previous period’s ‘real body’. Obviously the larger the price action shown by the first candle, the more significant the reversal can be – there should however be an awareness that exceptionally large candles, first and second, probably denotes a non-technical event and
Spring Hammer
This is one of my favourite patterns and although it is only a one candle formation I find that if used with Stochastics oversold, or prices basing near a trend or Fibonacci level, then it can be a great indicator of demand. The key element, see the image to the right, is the rejection of lower levels and it often doesn’t matter if the net result is a minor decline or improvement. From the textbook the ‘tail’, difference between the real body and the low, should be at least twice that of the body (open-close) but in practice I like to see a tail longer than that.
Rising Three
This pattern could also be regarded as continuation. The bullish trend is continuing with a strong rise for the 1 st candle. This is followed by a profit taking setback that lasts between 2-3 periods but this counter-move should ideally not break out of the real body parameters of the 1st^ candle. The pattern, and a renewal of the underlying trend, is completed by a 5th^ candle that completely regains the preceding 3 periods of decline.
Bearish Engulfing
Engulfing patterns (Bullish & Bearish) consist of 2 candles and also signals a complete change of direction. The image shown here is of the formation of a Bearish Engulfing pattern with the 1st candle showing fairly sizeable gains but the 2nd^ entirely overturning that upside. Obviously the larger the price action shown by the first candle, the more significant the reversal can be – there should however be an awareness that exceptionally large candles, first and second, probably denotes a non-technical event and therefore some awareness of the context may be needed to assess the impact.
Bearish Piercing/Dark Cloud
This pattern is the negative equivalent of the Bullish Piercing pattern. To achieve that the net decline has to reverse more than half of the preceding period. If the fall is not deep enough to confirm the creation of the Piercing pattern it could form the marginally less significant Dark Cloud.
Inverted Hammer/Shooting Star
The Inverted Hammer pattern shows an aggressive rejection of the period’s high and it this upside failure, rather than whether the candle body shows small net gains or losses, that is important. As such it is a mirror image of the Bullish Hammer. A more extreme, and less common, variation of the Inverted Hammer is a Shooting Star. This is rarer as to form a perfect example the period that forms the upside failure has to open with a bullish gap higher and then the period following this candle opens with a gap lower. Due to the 24 hour FX markets the Shooting Star is almost never seen, but futures markets do produce such patterns.
Falling Three
This pattern is the mirror image of the bullish Rising Three. In one sense it is bearish and the other continuation as for it to be valid it needs to be created within a negative trend. This trend is interrupted, after a sizeable down candle, by a profit taking rally that, ideally should be 3 up periods but weak enough to only reverse the preceding down candle or perhaps not even that. The formation is completed by a renewal of selling pressure that results in a strong fall – very often the 5th^ candle is a similar size to the 1st.
3 Black Crows
The title is 3 Black Crows, and as you can see from the above it is graphically describing 3 periods of strong selling. But some leeway has to be given as the sequence may be 2 large declines or even 4. The key element is that within an established move lower some hesitation, minor profit taking, is followed by a renewal of the downside signalled by this candle pattern.
Doji Patterns
Doji patterns are love/hate candles. Many swear by them, others find them tougher to read. I’ve mentioned perspective before and where Dojis are formed it is vitally important to only place emphasis when it fits into the underlying scenario. Overall Doji patterns can be formed by minor net movement, positive or negative, but the nearer to an unchanged open to close the more they fit the theory. What they immediately signify is market indecision – both the upside and the downside has been tested but rejected. This is quite straightforward but this is where the perspective comes in. Doji patterns are often formed in quiet periods and it is then that their relevance has to be viewed as reduced. But when formed in normal market conditions then the key to their impact is what price action has preceded the formation. They are certainly a point where some thinking has to be done.
Gravestone
Here we have the complete opposite of the Long Legged Doji with the gains being much greater than the losses and so it is the upside rejection that is likely to have the greater impact on prices going forward. Once again it is context that is the key thing before assessing the possible movement.
Marabuzo Lines
What is a Marabuzo Line?
Before we can see the relevance of the Line we have to look at what a Marabuzo actually is. The term is applied to the real body of a candlestick that is larger than the norm. That is a fairly nebulous concept and there is no hard and fast rule that can be applied here. An evaluation of the chart being studied and the time period being used will determine the relevant numbers. Even that result will have to be reappraised to reflect different market conditions. Sideways, trendless trading will create less sizeable movements, therefore a relevant Marabuzo will, naturally, be of a smaller size than in volatile markets where all candlesticks are larger. Let us be clear; this style of analysis, like all Technical Analysis, is not a science but a reasoned application of principle.
