CRYPTOCURRENCY: ADVANCED CANDLESTICKING

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Two Candlestick Patterns Predicting A Bottom

By Ayton MacEachern | Updated July 24, 2008 — 2:00 AM EDT

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ODC

Oil-Dri Corp of America

38.23

 

-0.60%

LSCC

Lattice Semiconductor Corp

6.19

 

+0.49%

NFLX

Netflix Inc

316.48

 

-0.32%

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Candlesticks were developed by rice traders in Japan many centuries ago to help display price activity over a trading period. Candlesticks represent the opening, high, low and closing values for one period of trading; the period can be absolutely anything, including one minute, one hour, one day or even one year. The candles in the stock charts below are one-day candles.

The main body of the candlestick, as seen in the image below, represents the range between the opening price and closing price. In the case where the close is higher than the open, the candle is known as an open candlestick; it is often displayed in white or green (displayed blue in our charts below). If the closing price is below the opening price, the candlestick is known as a closed candlestick; it is often displayed in black or red (displayed red in our charts below.) The lines above and below the candlestick represent the high and low prices of the trading period, and are often known as wicks, or shadows.

There are many patterns that candlestick pattern traders can use to predict the movement of a stock. Because candlesticks are so visually appealing, traders can recognize patterns at glance that may signify a continuation or reversal. Let's take a look at two reversal patterns that could be signaling a bottom in the stocks they track.

Bullish Harami

As you can see in the example above, the bullish harami is a candlestick chart pattern in which a large closed candlestick is followed by a smaller open candlestick, the body of which is located within the vertical range of the larger body. This pattern predicts the reversal of a downward trend; the smaller the open candlestick, the more likely the reversal. Here are two stocks that have just shown us this chart pattern.

Midway Gold Corp. (NYSE:MDW) - This stock is a thinly traded stock that is currently at the bottom of its 52-week range. The Relative Strength Index is currently indicating that the stock may be oversold and poised for a reversal as it crosses back across the 30 line. This bullish harami candlestick pattern may confirm that a reversal is about to occur. Bullish traders should enter in long here, with a stop loss at $1.57, the low of the previous candle

Oil-Dri Corp. of America (NYSE:ODC) - Oil-Dri's stock is another that has just created a bullish harami candlestick pattern. Like with MDW, the RSI has verified that this stock is oversold. Although the RSI did not cross below the 30 level in this case, it is bouncing off this level and appears to be looking for support. Bullish traders going long here will want to place stop losses at the low of the previous candle - $16.31.

Bullish Engulfing Pattern

In the chart pattern above, we see the bullish engulfing pattern of a small closed candlestick is followed by a large open candlestick that completely "engulfs" the previous closed candlestick. The shadows, or tails, of the closed candlestick are short, which enables the body of the large candlestick to cover the entire candlestick from the previous period. This pattern suggests that the bulls have taken control of the price, and a reversal is anticipated. Here are a couple stocks that have just shown us a bullish engulfing pattern.

Lattice Semiconductor CP (Nasdaq:LSCC) - This stock is trading near its 52-week lows, and seems to be finding support at a pivot low. The price action of LSCC has created a bullish engulfing pattern, which, along with the recent RSI cross above the 30 level, is a good sign of reversal. Traders wishing to go long here should place a stop loss at the low of the engulfing candle - $2.66.

Netflix Inc. (Nasdaq:NFLX) - Netflix is an example of a bullish engulfing pattern that does not have verification of a reversal by the RSI. As you can see in the chart below, there is a strong engulfment that has occurred, but RSI is indicating indifference on whether the stock is oversold. Looking back about six trading days, you can see that another engulfing pattern was created, which ended up being a false signal. This stock is a perfect example of why candlestick patterns should only be used along with other technical indicators to predict future price action.

Candlesticks are merely a visual representation of supply and demand. As demand increases, the chance of the close being near the high is much better. The opposite is true as supply begins to outpace demand; the close will be closer to the low of the day as the price falls to try and boost demand. Because supply and demand are the main tenets of our financial markets, being able to visualize the relationship at a moment's notice is a great advantage to the trader. These patterns can be a useful tool for predicting future price movement when combined with other technical indicators such as the Relative Strength Index.

To learn more on candlesticks and their patterns, be sure to read The Art Of Candlestick Charting Part 1, Part 2, Part 3 and Part 4.

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