Market School: Japanese Candlesticks – Bullish Piercing Line

bullish-piercing-line-japanese-candlestick-patternBullish Piercing Line is a bottom reversal pattern (The opposite of the bullish Piercing Line pattern is the bearish Dark Cloud Cover Pattern). The formation appears during a downtrend. The first candle is a bearish long body. The next day market opens with a gap at a new low. Then the stock surges toward the close, managing to reach the midpoint of the prior day’s body. The bears will be second guessing their position.

Intensifying Factors:

- The greater the degree of penetration into the black real body, the more likely it will be a bottom reversal.
- If the second day opens below a major support level and closes above it.
- If on the second day there is heavy volume.
- A gap up or higher close on the next trading day.

[Real-Time Stock Chart via Daily Stocks for iPad]
Real-Time chart showing bullish piercing line pattern and it's opposite dark cloud cover and confirmation with SSTO

The bullish Piercing Line pattern is included in our Daily Stocks 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: Japanese Candlesticks

Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, Japanese rice trader of financial instruments. They were introduced to the Western world by Steve Nison in his book, Japanese Candlestick Charting Techniques. Candlestick chart patterns are subject to the interpretation of the user and they do not provide price targets, which could be viewed as a limitation.

Since most of the Japanese Candlestick patterns are short-term reversal patterns, trading solely based on them would be too risky. Therefore, we recommend our readers to use these patterns with other technical trading methods for confirmation.

These are the patterns that are included in our Daily Stocks iPad and Japanese Candlestick iPhone apps:

Bullish Patterns: Piercing Line, Kicking, Morning Star, Three Inside Up, Three Outside Up, Three White Soldiers, Engulfing, Harami, Side by Side White Lines, Rising Three Methods
Bearish Patterns: Dark Cloud Cover, Evening Star, Three Inside Down, Three Outside Down, Three Black Crows, Kicking, Engulfing, Harami, Side by Side White Lines, Falling Three Methods
Indecision Patterns: Gravestone Doji, Dragonfly Doji, Long Legged Doji

We will update this post with the appropriate links as we write a short tutorial on each candlestick pattern.

Market School: Narrow Range Bar (NR4 & NR7)

Most short term patterns rely on an expansion or contraction on volatility.  Determining narrow range bars is useful because a volatility expansion is often followed by a volatility contraction. Tony Crabel designed a method of defining the narrow range bars.  In his method, if the current day is the narrowest trading range of the last four days (current day and past three days) then it is called an NR4 day.  The most common narrow days are NR4 and NR7 (narrowest trading range of the last seven days).

Trading Strategy: Place an order to buy a penny above the top of the last day, or go short a penny or two below the low of the last day, respectively. Whichever order triggers, cancel the other order and replace it with a stop loss order.

nr4 and nr7 in a real-time chart indicating buy and sell signals in daily stocks for the iPad iOS application

The accuracy of this setup can be increased by trading when the last bar is an inside bar (ID: inside day).   An inside day occurs when the entire daily price range for a given security falls within the price range of the previous day (also known as Harami candlestick pattern).  An inside day pattern can be a powerful way of signaling either the trend reversals.

The NR4, NR7, NR4 ID and NR7 ID scans can be found in Daily Stocks for the iPad and they can also be found in Stock Scans for the iPhone.

[Screenshot via Daily Stocks for iPad]

NR4, NR7, NR4ID, and NR7ID scans shown in daily stocks for iPad as an actionable list

[Screenshot via Stock Scans for iPhone]
List of NR7 (Narrow Range Bar) stocks shown as an actionable list in Stock Scans for the iPhone

Market School: Technical Indicators 13 – Keltner Channel (KELT)

The Keltner Channel (KELT) shows a central moving average line plus channel lines at a distance above and below. The indicator is named after Chester W. Keltner (1909–1998) who described it in his 1960 book How To Make Money in Commodities. In Keltner’s description the centre line is a 10-day simple moving average of typical price, where typical price each day is the average of high, low and close,

The methodology that is used by this volatility based channel indicator is similar to Bollinger Bands (BOLL). Instead of using the standard deviation, the indicator uses the Average True Range (ATR) to set channel distance. ATR is more constant than standard deviation, which makes this indicator easier to read.

We recommend our readers to use Keltner Channel with other indicators, such as Stochastic Oscillator or Average Directional Index.

USES

Price Crossing the Channel: A close above the upper line is considered as a strong bullish signal, or a close below the lower line as strong bearish sentiment.

Keltner Channel(KELT) shown in a real-time chart

Track and use Keltner Channel (KELT) in your daily analysis in real-time with our iPhone & iPad apps.

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Take advantage of this one-time offer of $10 off of our very popular app, Stock Trading Ideas for the iPad & iPhone. This sophisticated app delivers hand-picked trading ideas based on technical indicators, support & resistance levels, Fibonacci lines and chart patterns. Stock Trading Ideas will be discounted for a limited time only, sale ends on Sunday March 17, 2013 so act now!

Available on the App Store

Market School: Technical Indicators 12 – Triple Exponential Average (TRIX)

Triple Exponential Average (TRIX) is a momentum indicator that displays the percent rate-of-change of a triple exponentially smoothed moving average of a security’s closing price. The triple exponential average (TRIX) indicator is an oscillator used to identify oversold and overbought markets, and it can also be used as a momentum indicator. Like many oscillators, TRIX oscillates around a zero line. When it is used as an oscillator, a positive value indicates an overbought market while a negative value indicates an oversold market. When TRIX is used as a momentum indicator, a positive value suggests momentum is increasing while a negative value suggests momentum is decreasing. Many analysts believe that when the TRIX crosses above the zero line it gives a buy signal, and when it closes below the zero line, it gives a sell signal. Also, divergences between price and TRIX can indicate significant turning points in the market.

USES

Since TRIX measures the rate-of-change of closing prices, a positive TRIX value is interpreted as a steady rise in the closing price of a security. A positive TRIX is thus akin to a positive trending price, allowing the indicator to act as a buy signal whenever it crosses up above the zero line. Similarly, crossing below the zero line suggests the price is tending to close down at the end of each period, which can be a sell signal.

The “signal line” is also a useful buy/sell indicator. Since the signal line period is shorter, a cross above it suggests that recent stock prices are closing much higher. A buy signal is triggered when TRIX crosses above its signal line, and a sell signal is triggered when TRIX crosses below its signal line. This method can generate false signals during sideways price movements, so it works best when prices are trending. It is therefore wise to use TRIX in tandem with other indicators for confirmation.

[Chart via Stock Signals]
Triple Exponentials Average (TRIX) in a real-time stock chart displayed via Stock Signals

Track and use Triple Exponential Average (TRIX) in your daily analysis in real-time with our iPhone & iPad apps.

Market School: Technical Indicators 11 – Average Directional Index (ADX)

The Average Directional Index (ADX) is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend.

The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.

USES

As the ADX Line is Non Directional, it does not tell you whether the market is in an uptrend or a downtrend (you must look to price or the +DI/-DI Lines for this) but simply how strong or weak the trend in the financial instrument you are analyzing is. When the ADX line is above 40 and rising this is indicative of a strong trend, and when the ADX line is below 20 and falling this is indicative of a ranging market.

ADX can also be used to identify the potential start of a new trend in the market. Very simply traders will look from below the 20 line to above the 20 line as a signal that the market may be beginning a new trend. The longer the market has been ranging, the greater the weight that most traders will give this signal.

Another way traders use the ADX is as a signal of trend reversals. When the ADX is trading above both the +DI line and the -DI line and then turns lower this is often a signal that the current trend in the market is reversing and traders will position themselves accordingly.
The final example on how traders use the ADX is to position to trade long when the +DI crosses above the -DI (as this is a sign that the buyers are winning out over the sellers) and to position to trade short when the +DI line crosses below the -DI (as this is a sign that the sellers are winning over the buyers).

Chart with Average Directional Index (ADX) indicator in a real time chart showing the beginning and confirmation of trends

Track and use Average Directional Index (ADX) in your daily analysis in real-time with our iPhone & iPad apps.

Updated iPhone Apps. Amazing Deal Alert.

3 iPhone showing Stock Scans, Overextended Stocks, and Japanese Candlesticks iOS apps

Three of a Kind: Major Enhancements to Our Three iPhone Apps

We’ve been hard at work again and have made some major improvements to three of our iPhone apps: Japanese Candlesticks, Overextended Stocks, and Stock Scans. We’ve updated the design to accomodate the iPhone 5, removed all advertisements from the apps and updated the algorithms. The results are three lean and mean technical analysis engines that have increased accuracy while finding more stocks for a more powerful list of potential trades. Best of all, all three of these apps are priced at just $3.99 each!

The following is a sample of the enhanced features and changes made in our algorithms and formulas for these three iPhone apps:

- Updates to the apps now happen at 5:00 pm ET getting you the scans you need, sooner.
- Improvements to the Japanese Candlestick formulas providing increased accuracy of the scans, which in turn finds more stocks.
- Enhancements to the Overextended Stocks and Stock Scans algorithms, providing better lists.

Download or upgrade Japanese Candlesticks
Download or upgrade Overextended Stocks
Download or upgrade Stock Scans

Arbitrage Trader Note: Buy SPX!

On February 25th, when the S&P500 index was trading at around 1,520′s, we wrote that the short-term market trend would turn to bearish and the setback would most likely test the 1,490 (maybe even further down to 1,450) level. Parallel to our expectations, following the elections in Italy, the market fell sharply on that day, closing at 1,487. Even though the Arbitrage Trader algorithm accurately predicted this mode in advance, the model did not forecast that the market would make up the decline in the following 2 trading sessions during which the market increased to where it stayed the week before. As our clients have noticed, the Arbitrage Trader model reversed its short-term forecast for the generic stock market to buy as of Friday morning:

- Statistical arbitrage model now recommends “buy”. Our Arbitrage Trader model algorithm is signaling a bullish trend in the indices for the coming 10-12 trading days. Even though we are moving only within the 2-3% distance from the all time high for the S&P500, the algorithm currently predicts further upside move. The bottom formation around 1,500 is also supporting further upside for the market.

- Technically, for the S&P500 index, 1,530 will be a key resistance level. Any daily close above this level with significant volume would confirm the bullish trend. For an aggressive trader, we would recommend 1,500 as a key support level or stop level.

In short, we now have a bullish view on the generic market for the coming 10-12 trading days and recommend our clients to buy into weakness in the market. However, we also strongly recommend frequent checks on our app as the overall volatility is now higher in the markets.

The short-term statistical arbitrage model that we use to generate these buy/sell market signals is the same model that we use to power Stock Arbitrage Trader for the iPhone & iPad to generate buy/sell signals for specific stocks. Click here to learn more or download now!

Market School: Technical Indicators 10 – On Balance Volume (OBV)

On Balance Volume (OBV) attempts to measure the level of accumulation or distribution by comparing volume to price movements. Volume is added to the indicator if closing price moves up and subtracted if closing price moves down. No adjustment is made if closing price is unchanged.  On Balance Volume should be used in conjunction with other indicators.

USES

The idea behind the OBV indicator is that changes in the OBV will precede price changes. A rising volume can indicate the presence of smart money flowing into a security. Then once the public follows suit, the security’s price will likewise rise.

Like other indicators, the OBV indicator will take a direction. A rising (bullish) OBV line indicates that the volume is heavier on up days. If the price is likewise rising, then the OBV can serve as a confirmation of the price uptrend. In such a case, the rising price is the result of an increased demand for the security, which is a requirement of a healthy uptrend.

However, if prices are moving higher while the volume line is dropping, a negative divergence is present. This divergence suggests that the uptrend is not healthy and should be taken as a warning signal that the trend will not persist.

The numerical value of OBV is not important, but rather the direction of the line. A user should concentrate on the OBV trend and its relationship with the security’s price.

OBV Declining in a chart indicating a SELL

Track and use On Balance Volume (OBV) in your daily analysis in real-time with our iPhone & iPad apps.

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