CANDLESTICK TERMINOLOGY AND MARKET EMOTION

CANDLESTICK TERMINOLOGY AND MARKET EMOTION

Technicals are the only way to measure the emotional component of the market. The names of the Japanese candlestick charts make this fact evident. These names are a colorful mechanism used to describe the emotional health of the market at the time these patterns are formed. After hearing the expressions "hanging man" or "dark-cloud cover," would you think the market is in an emotionally healthy state—of course not! These are both bearish patterns and their names clearly convey the unhealthy state of the market.

While the emotional condition of the market may not be healthy at the time these patterns form, it does not preclude the possibility that the market will become healthy again. The point is that at the appearance of, say, a dark-cloud cover, longs should take defensive measures or, depending on the general trend and other factors, new short sales could be initiated.

There are many new patterns and ideas in this book, but the descriptive names employed by the Japanese not only make candlestick charting fun, but easier to remember if the patterns are bullish or bearish. For example, in Chapter 5 you will learn about the "evening star" and the "morning star." Without knowing what these patterns look like or what they imply for the market, just by hearing their names which do you think is bullish and which is bearish? Of course, the evening star which comes out before darkness sets in, sounds like the bearish signal—and so it is! The morning star, then, is bullish since the morning star appears just before sunrise.

The other pivotal price point is the close. Margin calls in the futures markets are based on the close. We can thus expect heavy emotional involvement into how the market closes. The close is also a pivotal price point for many technicians. They may wait for a close to confirm a breakout from a significant chart point. Many computer trading systems (for example, moving average systems) are based on closes. If a large buy or sell order is pushed into the market at, or near, the close, with the intention of affecting the close, the Japanese call this action a night attack. Exhibits 3.4 to 3.7 illuminate how the relationship between a period's open, high, low, and close alters the look of the individual candlestick line. Now let us turn our attention to how the candlestick lines, alone or in combination, provide clues about market direction.