Ah, if we only had a way of knowing what the market is going to do next. This is what technical analysis is all about...using price history to predict the future. Traders have worked on it for centuries.
Perhaps the most successful technical analyst and trader of all time was Japanese rice broker Munehisa Homma, who amassed a huge fortune trading rice coupons in the late 1700's. He was a keen observer of trader's behavior and noted that psychology and trader's emotions affected prices. By correlating repetitive price patterns to trader behavior, he laid the foundation for Candlestick charting. This background explains why various Candlestick formations are used to predict future price direction from an interpretation of trader sentiment.
Every candlestick is comprised of a body and a wick. The body connects the open and closing prices in the form of a vertical rectangle and the wick is a vertical bar connecting the high and low prices. In the VectorVest system, the body is unfilled when the closing price is higher than the opening price and filled when the closing price is lower than the opening price. Let's open Vectorvest 7 and use our Market Timing Graph to describe some basic candlesticks formations and interpretations.
Using a one-month, end-of-day setting, an unfilled body is shown on July 7th, when the VectorVest Composite opened at $29.51 and closed at $29.75 per share. The high and low prices were $29.79 and $29.45, respectively. A filled body appeared the next day in which the close was slightly lower than the open. The open was also lower than the previous day's close, not a good sign, and the wick's low point was lower than the prior day's low, also not a good sign.
Finally, the filled body of July 8th was engulfed by the unfilled body of July 7th, i.e., its opening price was lower than the closing price of July 7th, and its closing price was higher than the open of July 7th. This two-bar candlestick formation is called a Bearish Harami. It is a warning that the uptrend reflected by the unfilled body may not continue.
It is worth noting that the Color Guard showed two green lights on July 7th and three yellow lights on Friday, July 8th. My commentary in the "Strategy" section of the July 8th, Views reflected concern that, "all was not peaches and cream," and the poor jobs report had seriously shaken investor confidence. Caution was advised. A long filled body appeared on Monday, July 11th, confirming that the rally had been reversed.
Although candlestick analysis worked very well in this example, I don't mean to imply that candlestick charting is infallible. A perfect "Hammer," which suggested that the market had bottomed, was formed on Wednesday, August 3rd. It failed miserably as the Price of the VectorVest Composite dropped $1.32 per share on Thursday.
To be fair, I must admit that "one-stick formations" are early signals and have a relatively poor probability of success. The probability of success increases when two or more candlesticks are in the formation, but they are often harder to interpret. Even though I don't rely on candlestick analysis that much, it's fun to look for Candlestick Clues.
P.S. If you want to learn more about candlestick charting, there's a plethora of information on the internet. I Googled "Candlestick Charting" and got 1,860,000 results in 0.11 seconds.
IT'S TERRIFIC.
If you haven't been visiting the Triathlon Challenge Results Page, you're missing-out on a lot of valuable information. Some of the contestants have turned in fantastic results this week. For example, the overall leader, T-01-DS-PW-LS, tacked on a 14.15% gain this week to raise his overall gain to 344.31%. He was short the entire week and is using "Sinking Sectors II" as his Strategy.
The big winner in the current leg so far is T-10-JL-DEW-LS. He has gained an astounding 22.65% this week and is using a Strategy of his own creation. He's using a sort of RV/RT Asc, which I can't recall ever seeing before. All the details of his portfolio setup are shown on the Results Page. Simply click on
http://www.vectorvest.com/Triathlon/ to go to the Results Page. It's Terrific.
FOLLOW-UP ON FOLLOW-THROUGH.
Last week I wrote about checking the futures each day before the market opens to make sure the market is rising when you're bullish and falling when you're bearish. We call this practice "Follow-Through" because the market has to follow-through with the guidance VectorVest has provided to you at the end of the previous day. How well does it work? Very well thank you and Mr. Jamie Curlee has the facts to prove it. Visit the VectorVest University to see this week's very important "Strategy of the Week" presentation: "Follow-Up on Follow-Through."