Technical side: Chart Patters what are they?

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source: http://www.chartpatterns.com/

Here is what Investopedia.com has to say about patterns:

In technical analysis, the distinctive formation created by the movement of security prices on a chart. It is identified by a line connecting common price points (closing prices, highs, lows) over a period of time. Chartists try to identify patterns to try to anticipate the future price direction. Also known as "trading pattern".

So generally chart patterns are formations made by connecting some points of the stock's movement for a period of time. With this definition one chartist may see a different chart pattern from another chartist if they have different time period and different movements as a connecting point.

Chart patterns can be made whether one uses a Candlestick chart, a Bar Chart, or a simple Closing Price Chart. These patterns are not exact and accurate answer to everyone's question if a stock is a buy or a sell but mainly it guides one to at least know what is the probable price action of the stock in the next couple of days base on historical price movement.

Patterns can be classified as Bullish pr Bearish chart patterns. 

source:http://www.torycapital.com

Bullish chart patterns are patterns that signify an upward trend meaning price action is predicted to go up because sellers are pushing the price up and buyers are willing to buy at a higher price believing that stock price are still going up due to an expected market recovery or boom in the economy.

Bearish chart patterns are the opposite of a bullish market. A bearish pattern signify an expected decline in prices brought about by fear of economic downfall or an expected poor economy. Such fear spur panic to investors thus sellers sell down to grab as much profit they can take before market gets stuck. Buyers on the other hand bargain hunt thus they bid for lower prices.

Patterns as well can be viewed as a Reversal or Continuation.

Source: http://tradegartleypattern.blogspot.com/

Reversal patterns indicate a opposite action from what has already been happening in the stock's price. If the stock has been on a downtrend for sometime a reversal pattern will indicate an expected upward thus investors anticipate such reversal and thus buy more of the stock to capitalize on the stocks lower price.

Continuation pattern on the other hand indicates that the stock price will be expected to go up further. With this expectation investors will buy more to ride with the stocks seemingly continuing rise.

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.