TATA MOTORS

Just Watch ! Do not Trade

Dear friends, 

 I think you have gather some knowledge of candlestick charting techniques. Now we can start to watch Indian market with candlestick charts. Closely watch below chart of TATA MOTORS, 26 Otober, 2015. Here I want to tell you from my last eight years of experience in Indian market & shares that it moves on weekly candlestick charts not on daily. 

So we have to see weekly charts mainly. Here in TATA MOTORs weekly chart you can see in 1st week of Oct. 2015 clearly appear a Hammar after a long fall from late March. After showing this beautiful Hammar Pattern the share price goes near about 100 points up in just only two weeks next. In share Market sure 100 points is big one. It is the fairness of Candlestick Charts !!!

DOJI STARS

THE MORNING AND EVENING DOJI STARS

When a doji gaps above a real body in a rising market, or gaps under a real body in a falling market, that doji is called a doji star. Exhibit 5.2 shows doji stars. Doji stars are a potent warning that the prior trend is apt to change. The session after the doji should confirm the trend reversal. Accordingly, a doji star in an uptrend followed by a long, black real body that closed well into the white real body would confirm a top reversal. Such a pattern is called an evening doji star (see Exhibit 5.13). The evening doji star is a distinctive form of the regular evening star. The regular evening star pattern has a small real body as its star (that is, the second candlestick), but the evening doji star has a doji as its star. The evening doji star is more important because it contains a doji.

A doji star during an uptrend is often the sign of an impending top. It is important to note that if the session after the doji star is a white candlestick which gaps higher, the bearish nature of the doji star is negated.

In a downtrend, if there is a black real body, followed by a doji star, confirmation of a bottom reversal would occur if the next session was a strong, white candlestick which closed well into the black real body. That three candlestick pattern is called a morning doji star (see Exhibit 5.14). This type of morning star can be a meaningful bottom. If, during a downtrend, a black candlestick gaps under the doji star, the potentially bullish implications of the doji star is voided. This is why it is important to wait for confirmation in the next session or two with doji stars.

If there is an upside gap doji star (that is, the shadows do not touch) followed by a downside gap black candlestick where the shadows also do not touch, the star is considered a major top reversal signal. This is called an abandoned baby top (see Exhibit 5.15). This pattern is very rare!

The same is true, only in reverse, for a bottom. Specifically, if there is a doji star that has a gap before and after it (where the shadows do not touch) it should be a major bottom. This pattern is referred to as an abandoned baby bottom (see Exhibit 5.16). It is also extremely rare! The abandoned baby is like a Western island top or bottom where the island session would be a doji.

 

Exhibit 5.17 shows that a doji star in early June halted the prior price decline. It is still called a star although the shadow of the doji star bottom overlaps the prior day's black real body. When the white real body appeared after the star, confirmation of the downturn was over. The black real body before and the white real body after the doji star made this three-line pattern a morning doji star.

On the doji star candlestick of Exhibit 5.18, prices broke under $.85. This was a support area from early in July. The fact that the new lows could not hold is considered bullish. Add to this the morning doji star pattern and you have two reasons to suspect a bottom.

In Exhibit 5.20, we see the three lines that form the evening doji star on March 17, 18, and 19. This pattern ended the rally that began with a hammer the prior week. This example again shows that certain candlestick configurations should have more latitude in the equity market. This is because, unlike futures, stock prices may open relatively unchanged from the prior close. This means that specific patterns that relate the open to the prior day's close may have to be adjusted for this fact. 

In the case of Dow Chemical, note how the evening doji star was not a true star. A doji star's real body (that is, its opening and closing price) should be over the prior day's real body. Here it was not. Therefore, allow more flexibility with candlestick indicators with equities. For those who monitor the equity markets, as you experiment with candlestick techniques, you should discover which patterns may have to be modified.

In Exhibit 5.21, one can see that a few weeks before 1987's major sell-off, an evening doji star top arose. The center candlestick of this pattern (the doji star) did not gap above the prior white candlestick as should a true star. However, as discussed in Exhibit 5.20, one should allow more latitude with this concept of gaps since stocks often open at, or very near, the prior session's close.

Exhibit 5.22 reveals a very unusual and ominous occurrence in that back-to-back evening doji patterns formed. Candlestick lines 1 through 3 formed an evening doji star. The next three sessions, lines 4 through 6, fashioned another evening doji star.

THE EVENING STAR

THE EVENING STAR

The evening star is the bearish counterpart of the morning star pattern. It is aptly named because the evening star (the planet Venus) appears just before darkness sets in. Since the evening star is a top reversal it should be acted on if it arises after an uptrend. Three lines compose the evening star (see Exhibit 5.7). The first two lines are a long, white real body followed by a star. The star is the first hint of a top. The third line corroborates a top and completes the three-line pattern of the evening star. The third line is a black real body that moves sharply into the first periods white real body. I like to compare the evening star pattern to a traffic light. The traffic light goes from green (the bullish white real body) to yellow (the star's warning signal) to red (the black real body confirms the prior trend has stopped).

In principle, an evening star should have a gap between the first and second real bodies and then another gap between the second and third real bodies. However, from my experience this second gap is rarely seen and is not necessary for the success of this pattern. The main concern should be the extent of the intrusion of the third day's black real body into the first day's white real body.

At first glance Exhibit 5.7 is like an island top reversal as used by Western technicians. Analyzing the evening star more closely shows it furnishes a reversal signal not available with an island top (see Exhibit 5.8). For an island top, the low of session 2 has to be above the highs of sessions 1 and 3. However, the evening star only requires the low of the real body 2 to be above the high of real body 1 to be a reversal signal.

The evening star pattern shown in Exhibit 5.9 reflects the Summer of 1987 which called the high of the Dow just before the crash. (I wonder if the Japanese technicians who use candlesticks were looking at this!)

Exhibit 5.10 provides an example of how candlestick indicators can transmit a reversal signal not easily found with Western tools. The last hour on September 5 and the first two hours the next day formed an evening star pattern. The star portion of this evening star pattern would not have been an island top based on the aforementioned discussion. In this instance, candlesticks provided a top reversal indication not available with the Western island top. Also note how the rally that ended with this evening star began with the morning star on September 4.

Although more important after an uptrend, the evening star can be important at the top of a congestion band if it confirms another bearish signal. (See Exhibit 5.11.) That is what happened in the middle of April. The star portion (that is, the second day) of the evening star coincided with a resistance area. The basis for this resistance at $413 was that it was an old support level from late March. Old support often converts to new resistance. Try to remember this! It is a very useful trading rule. Chapter 11 discusses support and resistance in more detail. In any case, the resistance level near $413 coincided with the appearance of the evening star thus reinforcing the negativeness of the pattern. 

Exhibit 5.12 shows a well-defined evening star in mid-December. The star was preceded by a strong, white real body and followed by a weak, black real body. A variation of an evening star appeared in mid-November. The reason it was a variation is that the evening star usually has a long, white real body preceding the star, and then a black real body after the star. We did not see the long, white or black real body lines here. We view this as a top, however, not only because of its minor resemblance to an evening star pattern, but because of the hanging-man line on November 21 (the "star" portion of the evening star). The next day's opening under the hanging man's real body confirmed a top.

Some factors that would increase the likelihood that an evening or morning star could be a reversal would include:

1.      If there is a gap between the first candlestick's and star's real bodies and then in the star's and third candlestick's real bodies;

2.      If the third candlestick closes deeply into the first candlestick's real body;

A HISTORICAL NOTE

The full name of the evening and morning star patterns are the three-river evening star and the three-river morning star. I originally thought they were termed "three-river" evening and morning stars because each of these patterns had three candlestick lines—hence three rivers. I discovered that the origin is much more fascinating.

Nobunaga Oda, a major military figure of the late 16th century, was one of the three military leaders who unified feudal Japan. He fought a seminal battle that occurred in a very fertile rice growing province. Since rice was a gauge of wealth, Nobunaga, was as determined to wrest this area as fervently as the owners were to defend it. This fertile rice area had three rivers. The heavily defended area made it difficult for Nobunaga to cross these three rivers. Victory was his when his forces finally forded these three rivers. Hence the name "three river" morning and evening star where it is difficult to change the trend. Yet, victory for the attacking army is assured when the hurdle of the "three rivers" is crossed.

3.     If there is light volume on the first candlestick session and heavy volume on the third candlestick session. This would show a reduction of the force for the prior trend and an increase in the direction force of the new trend.

STARS

STARS

"One cannot be too cautious"

One group of fascinating reversal patterns is that which includes stars. A star is a small real body that gaps away from the large real body preceding it (see Exhibit 5.1). It is still a star as long as the star's real body does not overlap the prior real body. The color of the star is not important. Stars can occur at tops or at bottoms (sometimes a star during a downtrend is labeled a rain drop). If the star is a doji instead of a small real body, it is called a doji star (see Exhibit 5.2).

The star, especially the doji star, is a warning that the prior trend may be ending. The star's small real body represents a stalemate in the tug of war between the bulls and bears. In a strong uptrend, the bulls are in charge. With the emergence of a star after a long white candlestick in an uptrend, it is a signal of a shift from the buyers being in control to

a deadlock between the buying and selling forces. This deadlock may have occurred either because of a diminution in the buying force or an increase in the selling force. Either way, the star tells us the prior uptrend power has dissipated and the market is vulnerable to a setback.

The same is true, but in reverse, for a star in a downtrend. That is, if a star follows a long black candlestick in a downtrend, it reflects a change in the market environment. For example, during the downtrend the bears were in command but a change is seen in the advent of the star, which signals an environment in which the bulls and the bears are more in equilibrium. The downward energy has thus been cooled. This is not a favorable scenario for a continuation of the bear market.

The star is part of four reversal patterns including:

1. the evening star;

2. the morning star;

3. the doji star; and

4. the shooting star.

In any of these star patterns the real body of the star can be white or black.

THE MORNING STAR

The morning star is a bottom reversal pattern. Its name is derived because, like the morning star (the planet Mercury) that foretells the sunrise, it presages higher prices. It is comprised of a tall, black real body followed by a small real body which gaps lower. The third day is a white real body that moves well within the first period's black real body. This pattern is a signal that the bulls have seized control. I will break down this three-candlestick pattern into its components in order to understand the rationale behind this last statement.

The market is in a downtrend when we see a black real body. At this time the bears are in command. Then a small real body appears. This means sellers are losing the capacity to drive the market lower. The next day, the strong white real body proves that the bulls have taken over. An ideal morning star would have a gap before and after the middle line's real body (that is, the star). This second gap is rare, but lack of it does not seem to vitiate the power of this formation.

Exhibit 5.4 shows that a bullish morning star pattern developed during December 19 through 21. The rally that began with this pattern ran out of steam with the dark-cloud cover on December 26 and 27. Exhibit 5.5 shows that the October lows were made via a star (the small real body in the first week in October). The week after this star, the market had a strong white real body. This white real body completed the morning star pattern. The black candlestick after this white body formed a dark-cloud cover. The market then temporarily backed off. The morning star nonetheless became a major bottom. Exhibit 5.6 shows a variation on the morning star in which there is more than one star (in this case there are three "stars"). Note how the third small real body session (that is, the third star) was a hammer and a bullish engulfing line.

PIERCING PATTERN

PIERCING PATTERN

During many of my speaking engagements, after I have discussed the bearish dark-cloud cover pattern, it's not too long before I am asked if there is an opposite formation. Yes, there is and it is called a piercing pattern. Just as a dark-cloud cover is a top reversal, its opposite, the piercing pattern, is a bottom reversal (see Exhibit 4.29). It is composed of two candlesticks in a falling market. The first candlestick is a black real body day and the second is a long, white real body day. This white day opens sharply lower, under the low of the prior black day. Then prices push higher, creating a relatively long, white real body that closes above the mid-point of the prior day's black real body.

The bullish piercing pattern is akin to the bullish engulfing pattern. In the bullish engulfing pattern the white real body engulfs the previous black real body. With the bullish piercing pattern, the white real body only pierces the prior black body. In the piercing pattern, the greater the degree of penetration into the black real body, the more likely it will be a bottom reversal. An ideal piercing pattern will have a white real body that pushes more than halfway into the prior session's black real body. If the market closes under the lows of the bullish engulfing pattern or the piercing pattern by way of a long black candlestick, then another downleg should resume.

The psychology behind the piercing pattern is as follows: The market is in a downtrend. The bearish black real body reinforces this view. The next day the market opens lower via a gap. The bears are watching the market with contentment. Then the market surges toward the close, managing not only to close unchanged from the prior day's close, but sharply above that level. The bears will be second guessing their position. Those who are looking to buy would say new lows could not hold and perhaps it is time to step in from the long side.

The piercing pattern signal increases in importance based on the same factors (1) through (4) as with the dark-cloud cover, but in reverse. (See previous section.) In the section on the dark-cloud cover, I mentioned that although some Japanese traders like to see the black real body close more that midway in the prior white candlestick, there is some flexibility to this rule. With the piercing pattern, there is less flexibility. The piercing pattern's white candlestick should push more than halfway into the black candlestick's real body. The reason for less latitude with the bullish piercing pattern than with the bearish dark-cloud cover pattern is the fact that the Japanese have three other patterns called the on-neck, the in-neck, and the thrusting pattern (see Exhibits 4.30 to 4.32) that have the same basic formation as the piercing pattern, but which are viewed as bearish signals since the white real body gets less than halfway into the black's real body.

Thus these three potentially bearish patterns (Exhibits 4.30 to 4.32) and the bullish piercing pattern (Exhibit 4.29) all have the same form. The difference between them is in the degree of penetration by the white candlestick into the black candlestick's real body. The on-neck pattern's white candlestick (usually a small one) closes near the low of the previous session. The in-neck pattern's white candlestick closes slightly into the prior real body (it should also be a small white candlestick). The thrusting pattern should be a longer white candlestick that is stronger than the in-neck pattern but still does not close above the middle of the prior black real body.

With these patterns, as prices move under the white candlestick's low, the trader knows that it's time to sell. (Note that the thrusting pattern in Exhibit 4.32 is bearish in a declining market, but as part of a rising market, would be considered bullish. The thrusting pattern is also bullish if it occurs twice within several days of each other.)

It is not important to remember the individual patterns in Exhibits 4.30 to 4.32. Just remember the concept that the white candlestick should push more than halfway into the black candlestick's real body to send a bottom reversal signal.

In Exhibit 4.33, the bears successfully knocked the market to new lows for the move on April 27 as shown by the long black day. The next day the market opened lower. This opening turned out to be the low of the day and Boeing closed well within the prior day's black real body. The two candlesticks on April 27 and 28 created the bullish piercing pattern.

Exhibit 4.34 shows a classic piercing pattern during the week of March 26. Note how the white real body followed a very weak long, black real body. The white day opened on a new low for the move. The strong close that day, which pushed well into the previous black real body, was a powerful indication that the bears lost control of the market. The white day was a very strong session. It opened on its low (that is, a shaven bottom) and closed its high (that is, a shaven head). Note how this bullish piercing pattern brought to an end the selloff that commenced with the bearish engulfing pattern of March 19 and 20.

On this Wheat chart there is also a variation of the piercing pattern during the week of March 12. The reason it is a variation is because the white real body opened under the prior day's real body, but not under the prior day's low. Nonetheless, because the white real body closed more than 50% into the prior day's black real body it was a warning sign that the prior downleg was running out of steam.

Exhibit 4.35 illustrates how candlestick patterns can help the analyst get a quick sense of the market's health. During the latter part of February 1990, a broker asked me what I thought of oats. I rarely monitor oats. Nonetheless, I retrieved the candlestick chart shown in Exhibit 4.35 and told him that the downtrend was probably over. Why? I had noticed that during the week of February 20, an almost classic piercing pattern appeared. I also saw this piercing pattern coincided with a successful test of the early February lows. This increased the chance that a double bottom had been built.

Exhibit 4.36 illustrates that the downtrend, which began with the bearish engulfing pattern in late 1984, ended in mid-1987 with the appearance of this piercing pattern. Although the market did not rally after this bottom reversal signal, the signal did forecast the end of the selling pressure that had pulled the market down from mid-1984 to mid-1987. After the piercing pattern the market stabilized for a year, and then rallied.

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DARK-CLOUD COVER

DARK-CLOUD COVER

Our next reversal pattern is the dark-cloud cover (see Exhibit 4.24). It is a two candlestick pattern that is a top reversal after a uptrend or, at times, at the top of a congestion band. The first day of this two candlestick pattern is a strong white real body. The second day's price opens above the prior session's high (that is, above the top of the upper shadow). However, by the end of the second day's session, the market closes near the low of the day and well within the prior day's white body. The greater the degree of penetration into the white real body the more likely a top will occur. Some Japanese technicians require more than a 50% penetration of the black session's close into the white real body. If the black candlestick does not close below the halfway point of the white candlestick it may be best to wait for more bearish confirmation following the dark cloud cover.

The rationale behind this bearish pattern is readily explained. The market is in an uptrend. A strong white candlestick is followed by a gap higher on the next session's opening. Thus far, the bulls are in complete control. But then no continuation of the rally occurs! In fact, the market closes at or near the lows of the day moving well within the prior day's real body. In such a scenario, the longs will have second thoughts about their position. Those who were waiting for selling short now have a benchmark to place a stop—at the new high of the second day of the dark-cloud cover pattern.

The following is a list of some factors that intensify the importance of dark-cloud covers:

1. The greater the degree of penetration of the black real body's close into the prior white real body, the greater the chance for a top. If the black real body covers the prior day's entire white body, a bearish engulfing pattern would occur. The dark-cloud cover's black real body only gets partially into the white body. Think of the dark-cloud cover as a partial solar eclipse blocking out part of the sun (that is, covers only part of the prior white body). The bearish engulfing pattern can be viewed as a total solar eclipse blocking out the entire sun (that is, covers the entire white body). A bearish engulfing pattern, consequently, is a more meaningful top reversal. If a long, white real body closes above the highs of the dark-cloud cover, or the bearish engulfing pattern, it could presage another rally.
2. During a prolonged uptrend, if there is a strong white day which opens on its low (that is, a shaven bottom) and closes on its high (that is, a shaven head) and the next day reveals a long black real body day, opening on its high and closing on its low, then a shaven head and shaven bottom black day have occurred.
3. If the second body (that is, the black body) of the dark-cloud cover opens above a major resistance level and then fails, it would prove the bulls were unable to take control of the market.
4. If, on the opening of the second day there is very heavy volume, a buying blow off could have occurred. For example, heavy volume at a new opening high could mean that many new buyers have decided to jump aboard ship. Then the market sells offs. It probably won't be too long before this multitude of new longs (and old longs who have ridden the uptrend) realize that the ship they jumped onto is the Titanic. For futures traders, very high opening interest can be another warning.

Exhibit 4.25 demonstrates the difference between the dark-cloud cover and the bearish engulfing pattern. The two candlesticks in June 1989 constitute a dark-cloud cover. A long, white real body is followed by a long, black real body. The black real body opened on a new high for the move and then closed near its lows and well into the prior day's white real body. The municipal bond market backed off after this top reversal appeared. The final coup de grace came a few weeks later when the bearish engulfing pattern materialized. We see how the dark-cloud cover's black real body covered only part of the prior white real body. The black real body of the bearish engulfing pattern enveloped the entire previous white real body.

In Exhibit 4.26 three dark-cloud covers can be seen. Other bearish signals confirmed each of these patterns. Let us look at them on an individual basis.

1. Dark-cloud cover 1. This is a variation on the ideal dark-cloud cover pattern. In this dark-cloud cover, the second day's black real body opened at the prior day's high instead of above it. It was still only a warning sign but it was viewed as a negative factor. This dark-cloud cover also signified a failed attempt by the bulls to take out resistance at the mid-February highs.
2. Dark-cloud cover 2. Besides this dark-cloud cover, there was another reason for caution at this $21 level. A technical axiom is that a prior support level, once broken, can convert to new resistance. That is what happened at $21. Note how the old $21 support, once breached on March 9, converted to resistance. The failed rally attempt during the dark-cloud cover pattern during the first two days of April proved this resistance.
3. Dark-cloud cover 3. This shows that there was also a failure at a resistance zone made during the late April highs.

These are instances where the bearish dark-cloud cover coincided with resistance levels. This concept, where more than one technical indicator corroborates another, is important. It is the main focus of the second half of this book where the combination of candlestick techniques with other technical tools is discussed.

Exhibit 4.27 shows that during the early part of March, dark-cloud cover 1 halted a two-week rally. A week-long correction ensued. Two more dark-cloud covers formed in April. Dark-cloud cover 2 hinted that the prior sharp two-day rally was probably over. Dark-cloud cover 3, in mid-April, was especially bearish. Why did this dark-cloud cover turn out to be so negative? The reason has to do with the psychology of this pattern.

As noted previously, the rationale behind the negative aspect of the dark-cloud cover is the result of a new high on the open, with the market closing deeply into the prior white real body. What would happen, though, if, on the second day of the dark-cloud cover, the open penetrates the highs not from days, or even weeks ago, but from months ago and then fails at these new highs? This would produce very negative connotations. This is the scenario that unfolded in April. The highest levels in at least three months were touched on the black candlestick session of dark-cloud cover 3. This high failed to hold and prices closed well within the prior white real body.

In Exhibit 4.28, we see that the price incline commencing February 10 came to an abrupt halt with the mid-February dark-cloud cover.

ENGULFING PATTERN

ENGULFING PATTERN

The hammer and hanging man are individual candlestick lines. As previously discussed, they can send important signals about the market's health. Most candlestick signals, however, are based on combinations of individual candlestick lines. The engulfing pattern is the first of these multiple candlestick line patterns. The engulfing pattern is a major reversal signal with two opposite color real bodies composing this pattern.

Exhibit 4.18 shows a bullish engulfing pattern. The market is in a downtrend, then a white bullish real body wraps around, or engulfs, the prior period's black real body. This shows buying pressure has overwhelmed selling pressure. Exhibit 4.19 illustrates a bearish engulfing pattern. Here the market is trending higher. The white real body engulfed by a black body is the signal for a top reversal. This shows the bears have taken over from the bulls.

There are three criteria for an engulfing pattern:

1. The market has to be in a clearly definable uptrend or downtrend, even if the trend is short term.
2. Two candlesticks comprise the engulfing pattern. The second real body must engulf the prior real body (it need not engulf the shadows).
3. The second real body of the engulfing pattern should be the opposite color of the first real body. (The exception to this rule is if the first real body of the engulfing pattern is so small it is almost a doji (or is a doji). Thus, after an extended downtrend, a tiny white real body engulfed by a very large white real body could be a bottom reversal. In an uptrend, a minute black real body enveloped by a very large black real body could be a bearish reversal pattern).

The closest analogy to the Japanese candlestick engulfing pattern is the Western reversal day. A Western reversal day occurs when, during an uptrend (or downtrend), a new high (or low) is made with prices closing under (or above) the prior day's close. You will discover that the engulfing pattern may give reversal signals not available with the Western reversal day. This may allow you to get a jump on those who use traditional reversal days as a reversal signal. This is probed in Exhibits 4.21, 4.22, and 4.23.

Some factors that would increase the likelihood that an engulfing pattern would be an important reversal indicator would be:

1. If the first day of the engulfing pattern has a very small real body and the second day has a very long real body. This would reflect a dissipation of the prior trend's force and then an increase in force behind the new move.
2. If the engulfing pattern appears after a protracted or very fast move. A protracted trend increases the chance that potential buyers are already long. In this instance, there may be less of a supply of new longs in order to keep the market moving up. A fast move makes the market overextended and vulnerable to profit taking.
3. If there is heavy volume on the second real body of the engulfing pattern. This could be a blow off.
4. If the second day of the engulfing pattern engulfs more than one real body.

Exhibit 4.20 shows that the weeks of May 15 and May 22 formed a bullish engulfing pattern. During the last two weeks of July, a bearish engulfing pattern emerged. September's bullish engulfing pattern was the bottom of the selloff prior to the major rally.

In Exhibit 4.21 a monthly crude oil chart with both the bullish and bearish engulfing patterns can be seen. In late 1985, a precipitous $20 decline began. The third and fourth month of 1986 showed the two candlestick lines of the bullish engulfing pattern. It signaled an end to this downtrend. The rally that began with this bullish engulfing pattern concluded with the bearish engulfing pattern in mid-1987. The small bullish engulfing pattern in February and March of 1988 terminated the downtrend that started with the mid-1987 bearish engulfing pattern. After this bullish engulfing pattern, the trend went from down to sideways for five months.

The black candlestick of February 1990 came within 8 ticks of engulfing the January 1990 white candlestick. Consequently, this was not a perfect bearish engulfing pattern but, with candlesticks, as with other charting techniques, there should be some latitude allowed. It is safer to view this as a bearish engulfing pattern with all its inherently bearish implications than to ignore that possibility just because of 8 ticks. As with all charting techniques, there is always room for subjectivity.

The bearish engulfing patterns in 1987 and in 1990 convey an advantage provided by the engulfing pattern—it may give a reversal signal not available using the criteria for a reversal day in Western technicals. A rule for the Western top reversal day (or, in this case, reversal month) is that a new high has to be made for the move. New highs for the move were not made by the black real body periods in the bearish engulfing patterns. Thus, using the criteria for the Western reversal they would not be recognized as reversal patterns in the United States. Yet, they were reversals with the candlestick techniques.

Exhibit 4.23 is a series of bearish engulfing patterns. Pattern 1 dragged the market into a multi-month lateral band from its prior uptrend. Engulfing pattern 2 only called a temporary respite to the rally. Bearish engulfing patterns 3, 4, and 5 all gave reversal signals that were not available with Western technical techniques (that is, since no new highs were made for the move they were not considered reversal weeks).

> HAMMER AND HANGING-MAN LINES

In Exhibit 4.14 we see that the rally, which began in early February, terminated with the arrival of two consecutive hanging-man lines. The importance of bearish confirmation after the hanging-man line is reflected in this chart. One method of bearish confirmation would be for the next day's open to be under the hanging man's real body. Note that after the appearance of the first hanging man, the market opened higher. However, after the second hanging man, when the market opened under the hanging man's real body, the market backed off.

Exhibit 4.15 illustrates that a black real body day, with a lower close after a hanging-man day, can be another method of bearish confirmation. Lines 1, 2, and 3 were a series of hanging-man lines. Lack of bearish confirmation after lines 1 and 2 meant the uptrend was still in force.

Observe hanging man 3. The black candlestick which followed provided the bearish confirmation of this hanging man line. Although the market opened about unchanged after hanging man 3, by the time of its close, just about anyone who bought on the opening or closing of hanging man 3 was "hanging" in a losing trade. (In this case, the selloff on the long black candlestick session was so severe that anyone who bought on the hanging-man day—not just those who bought on the open and close—were left stranded in a losing position.)

Exhibit 4.16 shows an extraordinary advance in the orange juice market from late 1989 into early 1990. Observe where this rally stopped. It stopped at the hanging man made in the third week of 1990. This chart illustrates the point that a reversal pattern does not mean that prices will reverse, as we discussed in Chapter 3. A reversal indicator implies that the prior trend should end. That is exactly what happened here. After the appearance of the hanging-man reversal pattern, the prior uptrend ended with the new trend moving sideways.

Another hanging man appeared in July. This time prices quickly reversed from up to down. But, as we have discussed previously, this cenario should not always be expected with a top trend reversal.

Exhibit 4.17 illustrates a classic hanging-man pattern in May. It shows a very small real body, no upper shadow, and a long lower shadow. The next day's black real body confirmed this hanging man and indicated a time to vacate longs. (Note the bullish hammer in early April.)

> HAMMER AND HANGING-MAN LINES

Drawing the intra-day chart using candlesticks shows the high, low, open, and close of the session (see Exhibit 4.11). For example, an hourly session would have a candlestick line that uses the opening and close for that hour in order to determine the real body. The high and low for that hour would be used for the upper and lower shadows. By looking closely at this chart, one can see that a hammer formed during the first hour on April 11. Like hammer 4 in Exhibit 4.10, prices gapped lower but the white candlestick which followed closed higher. This helped to confirm a bottom.

 

The second hourly line on April 12, although in the shape of a hammer, was not a true hammer. A hammer is a bottom reversal pattern. One of the criterion for a hammer is that there should be a downtrend (even a minor one) in order for the hammer to reverse that trend. This line is not a hanging man either since a hanging man should appear after an uptrend. In this case, if this line arose near the highs of the prior black candlestick session, it would have been considered a hanging man.

Exhibit 4.12 shows a hammer in early April that successfully called the end of the major decline which had began months earlier. The long lower shadow, (many times the height of the real body) a small real body, and no upper shadow made this a classic hammer.

 

Exhibit 4.13 shows a classic hanging-man pattern. New highs were made for the move via an opening gap on the hanging-man day. The market then gaps lower leaving all those new longs, who bought on the hanging man's open or close, left "hanging" with a losing position.

> HAMMER AND HANGING-MAN LINES

Exhibit 4.9 shows a series of bullish hammers numbered 1 to 4 (hammer 2 is considered a hammer in spite of its minute upper shadow). The interesting feature of this chart is the buy signal given early in 1990. New lows appeared at hammers 3 and 4 as prices moved under the July lows at hammer 2. Yet, there was no continuation to the downside. The bears had their chance to run with the ball. They fumbled. The two bullish hammers (3 and 4) show the bulls regained control. Hammer 3 was not an ideal hammer since the lower shadow was not twice the height of the real body. This line did reflect, however, the failure of the bears to maintain new lows. The following week's hammer reinforced the conclusion that a bottom reversal was likely to occur.

In Exhibit 4.10 hammers 1 and 3 are bottoms. Hammer 2 signaled the end of the prior downtrend as the trend shifted from down to neutral. Hammer 4 did not work. This hammer line brings out an important point about hammers (or any of the other patterns I discuss). They should be viewed in the context of the prior price action. In this context, look at hammer 4. The day before this hammer, the market formed an extremely bearish candlestick line. It was a long, black day with a shaven head and a shaven bottom (that is, it opened on its high and closed on its low). This manifested strong downside momentum. Hammer 4 also punctured the old support level of January 24. Considering the aforementioned bearish factors, it would be prudent to wait for confirmation that the bulls were in charge again before acting on hammer 4. For example, a white candlestick which closed higher than the close of hammer 4 might have been viewed as a confirmation. (contd.)