Monday, 1 August 2016




The Bullish Engulfing signal is found at the bottom of a downtrend.

Criteria for being Bullish Engulfing Signal:


  1. In order for the Bullish Engulfing signal to be valid, the following conditions must exist. The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.
  2. The second day of the signal should be a white candle opening below the Close of the previous day and closing above the Open of the previous day’s black candle.


The following Figure shows a Bullish Engulfing formation. After a downtrend the bears are enjoying their dominance. Then one day the stock gaps down and opens below the previous day's close. The bulls take over the stock and close it above the previous day's open. This show of strength by the bulls often leads to a reversal for the stock. Notice the Bullish Engulfing signal in the chart below. This happening when the stochastics being in oversold conditions makes for an excellent reversal signal. Traders should also be observant in noticing the price point at which the signal was formed. Anytime one notices these many signals conforming each other, the confidence should be high that the trade result would be favourable.



The Bearish Engulfing signal is found at the top of an uptrend.

Criteria:

In order for the Bearish Engulfing signal to be valid, the following conditions must exist:


  1. The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart. 
  2. The second day of the signal should be a black candle opening above the Close of the previous day and closing below the Open of the previous day’s white candle.


The following Figure shows a Bearish Engulfing formation. During the uptrend the bulls are happy. New amateur investors can no longer resist getting into this 'un-stoppable' stock. They start piling up long positions. The stock forms a long white candle. The next day because of upward pressure on the stock, it gaps up. But now smart money is selling out. They have realized the exuberance in the stock. Theis creates the dark candle that engulfs the prior white candle. There is is high degree of probability that the trend is reversed at this point. Notice the Bearish Engulfing signal in the chart of Dominion Resources Inc. The stock was showing great dominance by the bulls till three days before the signal. It slowly started giving way to indecisiveness (you can witness a Shooting Star) before the Bearish Engulfing signal finally capped the uptrend. If the black candle from the second day engulfs more than one candle from the previous trend, as in this case, it is that much more powerful in reversing that trend.
There are times when one notices a Bearish Engulfing signal in an oversold condition of the stock. i.e. after the stock has been in a downtrend. This is often referred to as Last Gasp Bearish Engulfing signal.



The Inverted Hammer signal is found at the bottom of a downtrend.

Criteria:

In order for the Bearish Engulfing signal to be valid, the following conditions must exist:

  1. The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart. 
  2. The Upper shadow must be at least twice the size of the body.
  3. The day after the Inverted Hammer is formed, one should witness continued buying.
  4. There should be no lower shadow or a very small lower shadow. The colour of the body does not matter, but a white body would be more positive than a black body.


The following Figure shows an Inverted Hammer formation. This is one of the reversal signals which seems contradictory to its use. The Inverted Hammer signal signifies the downtrend may be over. However, the candle itself (with its long upper shadow) seems to imply that the bears are still in control. The key is to see who controls the stock on the following day. If the stock closes with a good bullish candle, the bears will give up. Imagine from a bear's perspective. You are short the stock and everything is fine until it keeps going down. Then one day, the bulls charge and take the stock up intraday. You start to panic, but breathe a sigh of relief towards the end of the day. However, upon seeing the perseverence of the bulls on the following day, you will be prudent to cover your shorts. Notice the Inverted Hammer in the chart of AMGN, Inc. People familiar with technical analysis will immediately see the Double Bottom formation. The Inverted Hammer in this case confirmed the Double Bottom.The stochastics were below 20 indicating oversold conditions for the stock. The day following the Inverted Hammer, the stock gapped up and formed a bullish candles. Smart short sellers will get out at this point as the bulls take over.




The Hanging Man signal is found at the top of an uptrend.

Criteria:

In order for the Bearish Engulfing signal to be valid, the following conditions must exist:


  1. The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart. 
  2. The lower shadow must be at least twice the size of the body.
  3. The day after the Hanging Man is formed, one should witness continued selling.
  4. There should be no upper shadow or a very small upper shadow. The colour of the body does not matter, but a black body would be more positive than a white body.


The following Figure shows a Hanging Man formation. Similar to the Inverted Hammer, the Hanging Man signal is counter-intuitive. Just by looking at this candle formation, one can say that the bulls held their dominance..that they defended themselves against the bears. However candles should always be considered as part of the overall picture. In an uptrend, when the candles were long and white, the bulls were not challenged at all. they had a easy run. Now the bulls have to fight for every cent. They are tired after the uptrend. In this situation, if the bears can force the stock to close down on the day after the Hanging Man, the bulls will be more apt to lock in profits. This will give more room for the downside reversal.

Following chart shows a Hanging Man formation in AMLN. This signal was followed by a gap down the next day. Somebody wanted to get out in a hurry! On top of that, the stochastics were overbought and the Hanging Man was confirming a double top, with the resistance from late March. The market was very clearly telling investors to get out then. Remember, these candlestick signals have been tested for almost 400 years. They would not have been in existance if they wouldn't have worked.




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