Thursday, August 7, 2014

Candlestick Charts: Beyond the Basics


Learn How to Interpret Candlestick Patterns for Optimal Trades

By Martha Stokes CMT

Today’s chart is Disney (NYSE: DIS) for learning how to read and interpret candlesticks beyond the basics of what is taught in candlestick books and articles on the Internet.

There is a whole world of information in the candlestick patterns which most technical traders never learn, and therefore never use. Since analysis of price action is vital to the success of a technical trader, reading candlesticks beyond the basics of a specific candlestick pattern or a continuation or reversal pattern is essential if technical traders expect to earn the income of a professional trader.

DIS is an excellent example of why technical traders need to be able to read the chart for both the upside and downside price action. This stock is showing weakness in the candles, which the trend itself and the basic candle patterns do not reveal.


It is always important to not only study the price and time aspects of a chart, but also the quantity values as well. The 3 pieces of data available for a stock chart are PRICE, TIME, AND QUANTITY. Always incorporate quantity in the candlestick analysis, as this makes the interpretation complete and reliable. Without quantity with candlestick patterns, half of the most critical data for evaluation is missing.

The first correction, which started in late February, did not have any High Frequency Trading (HFT) action selling down, yet the black candles are long and volume is consistent through this correction, which ended in the middle of May. Checking the volume, price, and Volume Accumulation indicators, it is obvious that this is large-lot rotation quietly selling out of DIS during that period of time. YES, the stock continues further up, but the candlesticks are inconsistent runs, weaker volume, and smaller candles.

As the stock ran up in June, volume bars on up days are below average, a huge red flag that this run up is weak. It corrects and then resumes upward, this time on HFT volume, but no gap or big run up, even with heavy HFT volume. This tells technical traders that there is underlying selling pressure which has continued, even while smaller lots have driven price upward. The large lots are selling as the stock rises on smaller-lot speculative buying.

DIS is now in a sideways pattern at a new, an all-time high, and it continues to show larger-lot sell days on the candlesticks with weaker, smaller white candles on up days. The volume is now well below the average for this stock, and the candles that formed in July are also very weak. Many traders might be tempted to buy this stock at this level on a white candle; however, the candlesticks with volume and Volume Accumulation clearly show that the large lots are on the sell side.

Learn Effective Candlestick Analysis HERE.

Trade Wisely,

Martha Stokes CMT

Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses

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