Market School: Japanese Candlesticks – Bearish Falling Three Methods

Bearish Falling ThreeThe Falling Three Method is a bearish continuation pattern. The opposite of the bearish Falling Three Methods pattern is the bullish Rising Three Methods.

The first day’s red candlestick is followed by a group of small candlesticks, which hold within the long red candlesticks range. The small candlesticks can be any color but green is the most common. The final day is a strong red candlestick with a close below the first day’s close. The formation represents a rest before resuming the bearish trend, which is similar to Flag or Pennant formations.
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Market School: Japanese Candlesticks – Bearish Side by Side White Lines

bearish side by sideBearish Side by Side White Lines pattern is a bearish continuation pattern. The first candle is a red one and the next two are green candles. The second candlestick opens with a gap below the first and the third one is similar size candlestick that opens near the second one.

Side by Side White Lines appears in a bearish market. The first candlestick confirms the continuation of the bearish market.  The second and third days are failed attempt to reverse the downtrend.

Intensifying factors:
- The similarity of the last two candlesticks is important.
- If on the third day there is heavy volume.

Bearish Side by Side Chart

Gap Trading

In this post we go over Gap Trading; types of gaps, tips, and how Daily Stocks Pro can help you be a better Gap Trader.

Gaps are unfilled areas on a chart, in other words, an area where no trading takes place. A Gap can be either up or down and generally it is news driven.

Gaps are significant; there are many ways to take advantage of gaps. Some market speculators trade when fundamental or technical factors favor a gap and some fade gaps in opposite direction once a high or low point has been determined.

There are four types of gaps (source: wikipedia):

Breakaway Gap: It occurs when prices break away from an area of congestion. When the price is breaking away from a triangle (Ascending or Descending) with a gap then it can be implied that change in sentiment is strong and coming move will be powerful. One must keep an eye on the volume. If it is heavy after the gap is formed then there is a good chance that market does not return to fill the gap. When the price is breaking away on a low volume, there is a possibility that the gap will be filled before prices resume their trend.

Common Gap: It is also known as area gap, pattern gap or temporary gap. They tend to occur when trading is bound between support and resistance level on a short span of time and market price is moving sideways. One can also see them in price congestion area. Usually, the price moves back or goes up in order to fill the gaps in the coming days. If the gap is filled, then they offer little in the way of forecasting significance.

Exhaustion Gap: Signals end of a move. These gaps are associated with a rapid, straight-line advance or decline. A reversal day can easily help to differentiate between the Measuring gap and the Exhaustion gap. When it is formed at the top with heavy volume, there is significant chance that the market is exhausted and prevailing trend is at halt which is ordinarily followed by some other area pattern development. An Exhaustion gap should not be read as a major reversal.

Measuring Gap: Also known as Runaway Gap, a Measuring gap is formed usually in the half way of a price move. It is not associated with the congestion area; it is more likely to occur approximately in the middle of rapid advance or decline. It can be used to measure roughly how much further ahead a move will go. Runaway gaps are not normally filled for a considerable period of time.

Things to remember:

- Once a stock has started to fill the gap, it will rarely stop.
- Be sure that you correctly classify the gap. e.g. Exhaustion and Measuring Gaps predict the price moving in different directions.
- Be patient; wait for confirmation before taking a position.
- Be sure to watch the volume.

Daily Stocks Pro and Gap Trading

Daily Stocks Pro scans all US stocks for Gaps in real-time. If you are a day trader, you can use the constantly updating list to identify different type of gaps and trade by favoring or fading these gaps. If you are a swing trader, you can wait for the market close for your end-of-day gap trading strategy.

Please note that Daily Stocks Pro also provides auto Fibonacci lines. This is significant in Gap Trading since gapping a stock that crosses above resistance levels provides reliable entry signals. Similarly, a short position would be signaled by a stock whose gap down fails support levels.

Here are some screenshots from Daily Stocks Pro:


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Market School: Chart Patterns – Megaphone Bottom

Implication

A Megaphone Bottom also known as a Broadening Bottom is considered a bullish signal, indicating that the current downtrend may reverse to form a new uptrend.

Description

This rare formation can be recognized by the successively higher highs and lower lows, which form after a downward move. Usually, two higher highs between three lower lows form the pattern, which is completed when prices break above the second higher high and do not fall below it.

The pattern is completed when, usually on the third upswing within the pattern, prices break above the prior high but fail to fall below this level again.

Market School: Japanese Candlesticks – Bearish Harami

Harami_icon (1)The Bearish Harami pattern is a small red candlestick, which is contained with a prior relatively long green candlestick, it is the opposite of the Bullish Harami pattern. The formation is comparable to Inside Day pattern (see NR4 ID). The pattern is more significant if the second candlestick is a Doji. The Harami pattern without a Doji is usually not as significant of a reversal signal as the Engulfing pattern.

The heavy buying is reflected by first day’s long green candlestick, and then it is followed by the small red candlestick which implies uncertainty. This could indicate a trend reversal since the bulls’ power has diminished.

Intensifying factors:
- The smaller the second candlestick the stronger the reversal signal.

Bearish_Harami (1)

The bearish Harami pattern is included in our Daily Stocks Pro iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

Daily Stocks Pro & Auto Fibonacci Detection

Fibonacci retracement is a method of technical analysis for determining support and resistance levels. They are named after their use of the Fibonacci sequence. Retracement levels alert traders or investors of a potential trend reversal, resistance area or support area. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance.
Daily Stocks Pro runs an advanced algorithm that finds all the important retracement points for all US stocks in real-time. This is a feature that doesn’t exist in any other stock market related mobile application.

Here are a couple of examples from Daily Stocks Pro to show how Fibonacci Lines can help you in your trading:

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In the examples above, you can see that price found some temporary support or resistance at Fibonacci retracement levels. These levels are considered strong levels of support or resistance, and typical levels for a correction of a long-term, well-established trend. The Fibonacci Lines are ways to better determine entry points into a market.

Daily Stocks Pro displays Fibonacci Lines on shorter and longer timeframes as well. In the examples below you can see the same stock (SLW) and it’s Fibonacci Lines on shorter timeframes. This helps traders to see more detail.

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These fibonacci lines, running in real-time, are a great tool to add to your technical analysis arsenal and you can have access to them with Daily Stocks Pro.
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Market School: Japanese Candlesticks – Bearish Engulfing

Engulfing_iconBearish Engulfing Pattern is a reversal pattern characterized by a large red candlestick engulfing a green small candlestick, which appears after an uptrend.

The market has to be clearly in an uptrend. Day one continues the trend with a short green candlestick which suggests that the bulls are still in command. The second day is a long red day that engulfs the body of the first day, closing well below the previous days close. This implies that the uptrend is losing momentum and the bears are taking control.

Intensifying factors:
- The higher the relative signs of the bodies, the stronger the reversal signal.
- If the second day of the engulfing pattern engulfs more than one real body.
- If on the second day there is heavy volume.

Bearish Engulfing Pattern within a Real-Time Stock Chart

The bearish Engulfing pattern is included in our Daily Stocks Pro iPad and Japanese Candlestick iPhone apps.

For a full list of Japanese Candlestick Patterns tracked by these apps visit our Japanese Candlesticks Page.

Market School: Chart Patterns – Double Bottom

Chart Patterns is a new series of Market School posts that we will be releasing in the coming weeks.
Implication

A Double Bottom is considered a bullish signal, indicating a possible reversal of the current downtrend to a new uptrend.

Description

Double Bottoms are considered to be among the most common of the patterns. Since, they seem to be so easy to identify, the Double Bottom should be approached with caution by the investor.

The Double Bottom is a reversal pattern of a downward trend in a stock’s price. The Double Bottom marks a downtrend in the process of becoming an uptrend.

A Double Bottom occurs when prices form two distinct lows on a chart. A Double Bottom is only complete, however, when prices rise above the high end of the point that formed the second low.

The two lows will be distinct. The pattern is complete when prices rise above the highest high in the formation. The highest high is called the “confirmation point”.

Analysts vary in their specific definitions of a Double Bottom. According to some, after the first bottom is formed, a rally of at least 10% should follow. That increase is measured from high to low. This should be followed by a second bottom. The second bottom returning back to the previous low (plus or minus 3%) should be on lower volume than the first. Other analysts maintain that the rise registered between the two bottoms should be at least 20% and the lows should be spaced at least a month apart.

Sometimes the two lows comprising a Double Bottom are not at exactly the same price level. This does not necessarily render the pattern invalid. Analysts advise that if the second low varies in price from the first low by more than 3% or 4%, the pattern may be less reliable.

The bottoms will have a significant amount of time between them – ranging from a few weeks to a year depending on whether an investor is viewing a weekly chart or a daily chart.

Generally, volume in a Double Bottom is usually higher on the left bottom than the right. Volume tends to be downward as the pattern forms. Volume does, however, pick up as the pattern hits its lows. Volume increases again when the pattern completes, breaking through the confirmation point.

Important Characteristics

Following are important characteristic to look for in a Double Bottom.

Downtrend Preceding Double Bottom

The Double Bottom is a reversal formation. It begins with prices in a downtrend.

Time between Bottoms

Analysts pay close attention to the “size” of the pattern – the duration of the interval between the two lows. Generally, the longer the time between the two lows, the more important the pattern is as a good reversal. Some analysts suggest that investors should look for patterns where at least one month elapses between the bottoms. It is not unusual for a few months to pass between the dates of the two bottoms.

Increase from First Low

Some analysts argue the increase in price that occurs between the two bottoms should be consequential, amounting to approximately 20% of the price. Other analysts are not so definite or demanding concerning the price increase. For some, an increase of at least 10% is adequate. The rise between the lows tends to look rounded but it can also be irregular in shape.

Volume

Volume tends to be heaviest during the first low and lighter on the second. It is common to see volume pick up again at the time of breakout.

Pullback after Breakout

A pullback after the breakout is usual for a Double Bottom.

Trading Considerations

Duration of the Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to its target price. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Inbound Trend

The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Support

Support and Resistance

Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.

Location of Moving Average

The Double Bottom should be below a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Direction of Moving Average Trend

The Moving Average should change direction within the duration of the pattern and should head in the direction indicated by the pattern. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Volume

A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Other Patterns

Other reversal patterns (such as Bullish and Bearish Engulfing Lines and Islands) that occur at the peaks and valleys indicate strong resistance at those points. The presence of these patterns inside a Double Bottom is a strong indication in support of this pattern.

Criteria that Refute

No Volume Spike on Confirmation

The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.

Location of Moving Average

If the Double Bottom is above the Moving Average then this pattern should be considered less reliable. Compare the location of the pattern to a Moving Average of appropriate length. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average.

Moving Average Trend

Look at the direction of the Moving Average Trend. For short duration patterns use a 50 day Moving Average, for longer patterns use a 200 day Moving Average. A Moving Average that is trending in the opposite direction to that indicated by the pattern is an indication that this pattern is less reliable.

Short Inbound Trend

An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.

Underlying Behavior

A Double Bottom consists of two well-defined lows at approximately the same price level. This shape is formed because prices fall to a support level, rally and pull back up, then fall to the support level again before increasing and eventually breaking through the resistance line.

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