Technical side: Candlestick Bearish Patterns

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Been reading Steve Nison's book "JAPANESE CANDLESTICK CHARTING TECHNIQUES" and I would to share with you some of the most popular bearish candlestick patterns. These patterns usually act as a reversal indicator which could be use to your advantage in your buy or even sell strategy.


Hanging Man

It is a single candle with a small body(either white/green or black/red) and a long lower tail just like the image below.

source: http://www.candlestickanalysis.com

It is usually found at the top of a uptrend and it signals the reversal of the uptrend. In effect it has a opposite effect of a hammer. Hanging man usually signals the point where the uptrend starts to go down. The continuous uptrend prompts buyers to buy while price is low while sellers keeps on demanding higher price. 

When the hanging man candle appears it means that those who bought are now left out hanging because the trend now is reverse. The stock is now overbought and everyone wants to get rid of their holdings thus they are force to sell lower.






Bearish Engulfing 


A chart pattern made of two candles of which a white/green candle with a small body is followed by a taller black/red candle making it look like the black/red candle will engulf the small candle.

source: www.investopedia.org

Such pattern indicates the change in trend after uptrend. 

Dark Cloud Cover

A Dark Cloud Cover is a pattern where a tall white/green candle is followed by a  black/red candle which has a higher open and a closing price not below the previous closing price.

source: http://www.econtrader.com

Bearish Piercing Pattern

A Bearish Piercing Pattern is made when a black/red tall candle is followed by a small white/green candle that is below midway the black candle's body. If the white/green candle's body is above midway of the black/red's body the pattern indicates a Bullish Piercing Pattern.

Such pattern is a continuation of a downtrend. When the white/green candlestick's body is above midway of the black/red candle, it could indicate of a reversal of the downtrend.

Technical side: What are Candlesticks?

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source: http://www.candlestickpicks.com/

First of all lets know where Candlesticks came from. Let's borrow some history information from Investopedia.com

The candlestick techniques we use today originated in the style of technical charting used by the Japanese for over 100 years before the West developed the bar and point-and-figure analysis systems. 

source: http://optionalpha.com

In the 1700s, a Japanese man named Homma, a trader in the futures market, discovered that, although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. He understood that when emotions played into the equation, a vast difference between the value and the price of rice occurred. This difference between the value and the price is as applicable to stocks today as it was to rice in Japan centuries ago. The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions surrounding a stock. Read more

The Concept of Candlesticks

source: http://stockcharts.com

A candle is formed as per above illustration. A candle has 3 parts: the upper shadow/wick, the body, and the lower shadow/tail. Relevant information as shown above correspond to the Open, High, Low, and Close information we get from trading.There are two basic candles one is the hollow candle(which is mostly green on other charting programs) and the filled/black candle(which is sometimes red in charting programs). 

A Hallow Candle is a bullish candle because it shows that the stock closed higher than its opening. Filled or black candle is a bearish candle indicating that the stock closed lower than its opening. Now the difference between the opening and closing can be seen in a candle's body length. An elongated candle means that the opening and the closing are far apart indicating a very high interest of the market. On the other hand a short body indicates a low interest and may even indicate that the stock is bound to consolidation.

Below is the candlestick chart of PSEi as of July 27, 2011 for our illustration:

PSEi as of July 27, 2011

As you can see above the green candle indicates a bullish trend from mid-June to the first week of July. Also if you noted in the end of June a successive long green candles led to one of the all time high of the PSEi with a sudden reversal indicated by the red candles but then it recovers with another series of elongated green candles that led to the 4506 finish of PSEi.

Candlesticks has become popular because it gives the stock analyst the feeling of the general market through the color and length of the body and shadows. In a glance one can see what is the market action and what is the likelihood of the next. The body of the candle generally indicates when a stock is bullish or bearish. The more it is elongated, the more it states how bearish or bullish it is. 

The wick or the tail also indicate at what price investors are willing to buy or sell. If the wick and tail is short it indicates that price action is within the range of the candle's body while longer shadows indicate that trading has gone beyond the range of the open and closing. 


Note: This is the first part of the topic regarding candlesticks. More postings will be made in the future.