KEY POINT:
A long candlestick does not always mean the same thing; it depends on where it appears. If it contradicts the direction of the prevailing trend, it signals reversal; if it conforms to the direction of that trend, it is a continuation indicator.
especially when long candlesticks have shown up, the short candlestick can indicate a struggle between buyers and sellers and a likely reversal in the trend, or a slowing down in price momentum.
short candlesticks
Th e appearance of a single short candlestick is not meaningful by itself. When a series of short candle-sticks sets a pattern, it may show declining momen-tum in the current trend or be a symptom of sideways movement. Th e lack of decisive control by either buy-ers or sellbuy-ers in such a series may be viewed as show-ing that the next price movement is not clear and will not be until one side or the other takes control.
3. Doji sessions. Th e session with no real body—one in which open and close are the same—is a very sig-nifi cant development if the session appears at the end of a current trend. Also called a narrow-range day (NRD) in swing trading, the fact that price opens and closes at the same place has even greater signifi -cance when the doji also has exceptionally long upper or lower shadows, or both. Th e longer shadows reveal an attempt by buyers (upper shadow) or sellers (lower shadow) to move price in the desired direction. How-ever, the eff ort failed when price retreat to close at the same price as the open.
Th e meaning of the failure on one side or the other, or on both sides, aff ects how the current trend is
viewed and what it means in terms of likely reversal.
For example, when a doji appears at the bottom of a downtrend and also has an exceptionally long low-er shadow, it shows that selllow-ers tried to move price lower but could not; this hints at the likely reversal in direction and a coming trend to the upside. If a doji appears at the top of an uptrend and also has a very long upper shadow, the same failed attempt is shown, this time among buyers. Th is foreshadows a likely re-versal and subsequent downtrend.
doji session
Confi rmation is essential to these interpretations, which are only generalizations unless confi rmation agrees with the interpretation of the doji session.
However, just as long candlesticks indicate excep-tional strength on one side of the buyer/seller equa-tion, doji sessions indicate a loss of momentum and, based on the appearance of any shadows, provide strong reversal signals.
4. Long upper and lower shadows. One of the most interesting signals in all of candlestick analysis is an exceptionally long shadow appearing on both
KEY POINT:
The appearance of a single short candlestick is not a signal at all, just part of the normal trading pattern. However, when a series of short candlesticks appears after a period of relatively long sessions, it implies falling momentum.
KEY POINT:
A doji to the candlestick analyst is the same thing as the narrow-range day (NRD) to the swing trader. The power of the doji is not only in its identical or close open and close, but also in the length and placement of its shadows.
sides of the real body. When such shadows are found in both upper and lower realms in comparison to the real body, it shows that neither buyers nor sellers had enough power to move price beyond the opening and closing range. Th is failure of both sides to control price movement is seen at times as the advent to a pe-riod of consolidation. When a candlestick shows up with long shadows on both sides and a current trend has been underway, it most often signals the end of that trend, even though both sides were unable to cre-ate more movement.
long upper and lower shadows
Long shadows both above and below the real body may be better understood when analysis is aided with a study of intraday charts in addition to daily charts.
Based on the level of volatility within the session, a trader may conclude that the volatility has little meaning as a reversal signal or that the chaotic na-ture of the trading day has created an environment
of uncertainty. Clearly, any existing trend will have most likely ended once this candlestick appears; what is not as certain is whether the trend will pause and continue, or fall apart and reverse.
5. Long upper shadow only. When a session con-tains an unusually long upper shadow, it signals that buyers have lost momentum or failed in an eff ort to take momentum away from sellers. If this pattern un-folds at the top of an uptrend, it is very likely a signal that the trend is about to end. If it shows up within a downtrend, it may confi rm or establish continuation;
buyers tried to reverse the downtrend, but failed.
long upper shadow only
Th is pattern also works in many two-stick or three-stick candlethree-stick patterns as one of the elements that makes up that pattern. For example, the inverted hammer is a bullish indicator after a long black can-dlestick and a downside gap, followed by the black or white session with a long upper shadow, a sign that the downtrend is reversing direction. A bearish ver-sion follows a long white candlestick, an upside gap,
KEY POINT:
When a session includes long upper and lower shadows, it usually means momentum in the current trend is ending. Both sides—buyers and sellers—were unable to move price beyond the real body range.
KEY POINT:
A long upper shadow demonstrates that buyers were not able to move price higher. This reveals weak or weakening buyer-driven momentum.
and then the inverted session—a smaller session with a long upper shadow, foreshadowing the highest point in the uptrend, to be followed next by a reversal and downtrend.
6. Long lower shadow only. Th e appearance of a candlestick with a long lower shadow has sig-nifi cance opposite of the session with a long upper shadow. It indicates a failure by sellers to move price lower, which leads to the immediate conclusion that either the current downtrend is ending, or an existing uptrend is continuing. However, the pattern can have either a bullish or a bearish interpretation.
long lower shadow only
Th e single session of this shape is either a hammer or a hanging man. Th e interesting thing about this pattern is that it can be bullish or bearish, depending on where it appears. Th e real body may also be either white or black, without aff ecting the interpretation of the session. A hammer appears at the bottom of a downtrend and is recognized as a relatively small real body of either color and an unusually long lower shadow. A hanging man is often the highest point in the uptrend and signals the reversal point. It consists of a small real body of either color and a long lower shadow, signaling the turn of direction and the begin-ning of a downtrend.
With all forms of candlesticks, “signifi cance” is a matter of content. Th e importance of a shape or pattern changes based on what occurred before the candlestick, and it may have either reversal or con-tinuation ramifi cations. Remember, also, that candle-stick patterns do not always have to mean anything of interest. In the daily trading pattern, some apparent signals are really not signals at all; this is why confi r-mation is so important.
KEY POINT:
A long lower shadow demonstrates that sellers were not able to move price lower. This reveals weak or weakening seller-driven momentum.
KEY POINT:
Not every development forms up as an indicator. To paraphrase Sigmund Freud, sometimes a candlestick is just a candlestick.
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abandoned baby (bear) a three-day pattern show-ing up at or near the conclusion of an uptrend, and sig-naling the probability of trend reversal. Th e fi rst day is an uptrend candle; the second occurs after an upside gap, and is either a narrow-range day (NRD) or a doji. After the second session, a downward gap occurs, and that gap is larger than the previous gap; the third day is bearish.
Th e second day, in which the narrow trading range or outright doji is found, is the key. Th is narrow trading reveals the end of momentum among buyers. Once the second gap appears and the third, downtrending day develops, the uptrend’s conclusion is clearly noted. Al-though the abandoned baby pattern is rare compared to other patterns, it is a very strong indicator.
Th e resulting downtrend will not necessarily be strong or long-lasting. Th e most dramatic reversal pattern is likely to occur after an uptrend that breaks through resistance with gapping patterns, and then it is reversed with the abandoned baby leading the new trend.
Th is pattern can also be broken down into the func-tion of each session. Th e fi rst session identifi es the end of the uptrend and is necessary for setting up the aban-doned baby, starting with the upside gap. Th e second session marks the loss of momentum and, possibly, a degree of uncertainty. Th is is visually represented in the narrow trading range. Reversal is identifi ed by a com-bination of the downside gap that follows and then the downward-moving session.
Based on the name, it is easy to conclude that the second session, a doji separated from the other two ses-sions by gaps, is not a part of the trend development.
However, it is not the separation that makes the pattern important but the repetitive gaps moving in opposite di-rections after the indecision between buyers and sellers.
Th e chart of Cisco Systems (CSCO) shows the bear abandoned baby pattern at the top of the uptrend. Th ere is a delayed reaction, however. Th e price does not re-act immediately; more than two weeks later, price gaps down more than four points.