By: Tom Gentile
on May 12th, 2023
In our ongoing quest to assess directional bias on the major market indices we see many patterns that give an indication the markets could trade higher, lower. We also see at times patterns or technical indicators that give an indication a market may continue or reverse their current trend.
In the world of technical analysis, the types of charts one uses can vary. One can use what’s called Open, High, Low or Close (OHLC) bars. Or they use a popular type of chart that are comprised of Japanese Candlesticks. There are other types of charts as well, like Line charts or Point and Figure charts) but for this article we will focus on Japanese Candlestick Charts.
Basic Construction of a Candlestick
The candlestick is formed giving data for a period of time. A candle can be a one-day candle, or it can represent a week or monthly candle. For this article we are going to use a candles that are 1-day candles.
The body of the candle in Tom’s Tools (www.tomsoptiontools.com) charts show red or green candle bodies. A red body is for a bearish day and green is for a bullish day.
What we are seeing is a one-candle signal. Look for the following characteristics:
- The candle itself either a slightly bullish or bearish body.
- That candlestick must have a long lower tail. More specifically, the lower shadow should comprise two-thirds or more of the total range of the candlestick bottom of the wick to top of the wick.
You see this in figure 1 regardless of the length of the total day’s range of either or both day’s ranges.
This is an indication of the battle between the bulls and the bears.
If the price of a candle period and again we are speaking and showing one day candles; if the price on the day dips lower than the days open price it is at that point showing the bears have the control on price action for the day thus far.
Sometime in the day of trade bulls take back control and push the price higher off the lows of the day to where it either closes slightly bearish, but significantly higher off the lows or bullish for the day. And it works in the reverse as well.
In the case where the long shadow is below the candle body we would look for the candle body to be green or bullish, (but sometimes the candle body can be slightly red/bearish).
The Long Lower Shadow candlestick is typically considered to be a bullish signal, but it is quite weak in this capacity. In addition, when the market is oversold or at support, the Long Lower Shadow candlestick tends to be more significant.
The Long Lower Shadow candlestick is typically considered to be a bullish signal and may signal a reversal to the upside or a continuation of an existing bullish trend.
The fact it is a one-day or one-period session but know that one-day patterns do not have the impact that a two- or three-day (period) has.
Where a Candle Pattern Happens is Just as Important as the Formation Itself
If a bullish reversal pattern happens at the end of a trend or down-leg or at a support.
Figure 2 is showing the SPY chart over the past 100 days of trade.
There is no long-term down trend on this chart to emphasize in relation to the long-legged shadow days of trade the prior two.
If one wants to consider 410 as a price support that is being generous and may be forcing one to want to think that is the case, but we are not seeing 410 as that major of a support.
The day of trade is not over yet, and it is yet to be seen how the candle looks at the close.
To see prices bought up off the low forming a long lower shadow would be consistent with the two trading days prior to today, but no guarantee it will happen. If it does that would have us leaning a bit bullish. If not, it will look like another day of consolidation in this sideways morass of trading which sees SPY trading in a range between 405-415.
App: Toms Option Tools
Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.