This post explores how a cluster of candlestick patterns or lines that coincide at the same price area can make that level an important market juncture. Exhibit 10.1 shows a confluence of candlestick-indicators that foretold a price setback and then another set of candlesticks that called the end of a selloff. In early June, a bearish hanging-man line is immediately followed by another negative technical signal-a doji. Prices then fell until a series of candlestick indicators signaled an important bottom. First, is the hammer. The next day is a bullish engulfing line. A few days later a minor selloff confirmed the solidity of support as the lows of the hammer day were maintained. This second test of the low created a tweezers bottom.
The September hammer in Exhibit 10.2 presaged a rally. In late November, the bonds built three candlestick top reversal indicators that put an end to this rally.
They were:
a hanging man;
a doji;
and a shooting star which was the coup de’grace.
Exhibit 10.3 illustrates how an individual candlestick line can give multiple signals. In early April, a long white real body is followed by a small real body with a long upper shadow. The shape of this line is that of a bearish shooting star. This line’s small real body (being within the previous day’s real body) makes it a harami. Finally, the top of the upper shadow (that is, the high of the day) on the shooting star day was also a failure at the February 1600 highs.
Exhibit 10.4 shows that within a period of a few weeks, this market formed a tweezers bottom, a bullish engulfing pattern, and a hammer.
Exhibit 10.5 shows that from mid to late July, a series of bearish candlestick indications occurred including a doji star followed by three hanging-man lines (as shown by 1, 2 and 3). In between hanging-man 1 and 2, a shooting star formed.
Exhibit 10.6 is a bearish candlestick signal within a bearish candlestick signal. The peak of the rally in December was touched by a hanging-man session. This hanging-man session was also the star portion of an evening star formation.
Exhibit 10.7 shows that May 9 through 11 delivered a series of top reversal candlestick signals at the $1.12 area. The tall white candlestick on May 9 was followed by a small real body candlestick. This second candlestick was a hanging man. It also, when joined to the prior candlestick, completed a harami pattern. On May 11, another assault at the $1.12 highs occurred. This assault failed via a shooting star line. These three sessions had nearly the same highs. This constructed a short-term top. Thus, within three sessions there were four bearish indications:
a hanging man;
a harami;
a shooting star; and
tweezers top.
The market backed off from these highs. The $1.12 price became significant resistance as evidenced by the bulls’ failure to punch above it during mid-June’s rally. This $1.12 level was important for another reason. Once broken on the upside on June 28, it converted to pivotal support. Observe the doji star that arose after the June 28 long white candlestick. We know a doji after a long white candlestick is a top reversal. This means the prior uptrend should end. For two days after the doji, the market showed it was running out of breath since there were two black candlesticks locked in a lateral band. The market had run out of steam-or so it had appeared.
Remember the May 9 through 11 resistance area? The lows of the two black candlestick sessions of July 2 and 3 held that old resistance as support. The bears had tried to break the market but they could not. Until that support broke, the back of the short-term bull market which commenced June 26 would not be broken. In this scenario, the confluence of candlesticks which was so important as a top on May 9 through 11 became influential again a few months later as important support.
Exhibit 10.8 illustrates how, in mid-1987, a series of candlestick signals intimated a top. Specifically, within a month there was a hanging man, a doji, and a dark-cloud cover. After the dark-cloud cover, the market sold off and, in the process, opened a window. This window became resistance on the brief rally just before the next leg lower. The selloff finally ended with the tweezers bottom and the bullish belt-hold line (although the white candlestick had a lower shadow it was small enough to view this line as a bullish belt hold).
Technical Resources 