*Japanese Candlestick Charting - a running exposition*

**DuncanKa** · 03-05-2016,

My intention with this thread is to investigate the predictive efficacy of Japanese candlestick charting. Many a practicioner swears by the forecasting ability of this Eastern method when employed in the hands of a skilled analyst. I make no claims at being such a skilled analyst therefore this thread will hopefully aid my development in this process as well as elucidate that it does not take a deft candlestick chartist to employ this technique.

Below I have have included six month charts in daily timeframe of the DJIA and the yield on the 10-year Treasury Note under the assumption these two can be generally viewed as proxies for the equity and fixed-income markets respectively. Over time I hope to incorporate other markets as representative of various asset classes including the US Dollar for currencies and oil or gold for commodities.

I aim to include a daily update should market activity warrant such frequency. I have included six months of price data below as a way to set the context rather than starting this project with no frame of reference.

One thing to keep in mind is that while many view Japanese candlestick charts as being unrivaled in signaling reversals and continuations the formations I hope to highlight going forward do not lend themselves well to projections or price targets. Western techniques are better for such a task. I plan to focus on candlestick patterns and as a result this will be a very short-term trend identification project. On some occassions I may incorporate Western techniques should I view them as enhancing the candlestick methods however my goal is not to focus on long-term trends but rather the day-to-day manifestations of the Japanese candlestick methods.

As with all technical analysis the following interpretations are subjective. You may see different indicators and signals than I do. I welcome constructive comments should I overlook a signal going forward.

effercads · 03-08-2016,

Here we see a Rising Window (a gap) in the yields on the Ten Year Note. According to candlestick methodology the bottom of the window is the close of the candle beneath the gap therefore for window is not closed until a candle closes inside the real body of the candle before the gap. Candlestick charting says that windows, rising and falling, should be viewed as support and resistance. In this case the Rising Window was tested and acted as support for 7 daily sessions until a Falling Window turned the trend toward lower rates.
The following three daily sessions met resistance at the Falling Window as prescribed by candlesticking.
The Evening Doji Star at 3 is a reversal signal and quickly reversed the nascent increase in rates.
A Falling Window formed with resistance at the lower end of the preceding candle (1.726%) which held until August 14th when a green (white) candle real body closed above the resistance level.
A Rising Window formed between July 26th and July 27th suggesting support at the level of 1.428% (the July 26th closing high). Yields more or less fell in the days following but found support without closing the window adding further significance to this level.
These six candles comprise a Rising Three Methods formation which is a bullish continuation pattern similar to a bull flag in Western technical analysis. Following a long green (white) candle a series of smaller bodied candles moves against the green candle. The formation is complete when a second long green candle closes above the first confirming the trend is higher. As long as the small bodied candles do not close outside the real body of the first candle anywhere from 2 or more intervening candles will still qualify this pattern as Three Methods. This pattern told us the path of least resistance was higher rates.
Following the Rising Three Methods we had a one day pullback via a Dragonfly Doji which was followed by a Rising Window the following day. This confirmed the Rising Three Methods signal that higher rates were to be expected in the near future.
The Spinning Top at #8 following an Advancing Block (three white candles with diminishing real bodies) signaled the trend of higher rates was losing steam. This was further reinforced by the narrow bodied candles forming under the 200 day moving average which culminated with a Bearish Engulfing Pattern on August 21st.
August 22nd saw a gap lower form a Falling Window which also looked to be a Bearish Belthold Line. The level of 1.805% is now expected to be resistance for higher rates.
The Rising Window in #7 acted as support for nearly a week but finally succumbed to lower rates in the form of a Bearish Belthold Line on August 31st.

*Note that all of the terminology being used with respect to these charts is of the directional variety. Typically falling rates are viewed as bullish moves for bonds due to the inverse nature of price and yield. For the sake of simplicity and continuity with the price charts to follow in this thread I am using the terms bearish and bullish to refer to up and down on the chart.

b.jpg

ememoGere · 03-08-2016,

April 10th and 11th formed a Tweezer Bottom when the same low was tested twice on back-to-back sessions. Tweezer Tops and Tweezer Bottoms are minor reversal signals that gain further imortance if they also form another candle pattern such as a Harami Cross. In this case the day following the Tweezer Bottom was a Bullish Belthold Line adding strength to the reversal signal and telling us the trend was now higher.
The April 17th and 19th sessions formed a Tweezer Top. Again, these are minor reversal signals. The weakness of this signal was hinted at by the long shadows under the real body red candles (black) following the reversal.
The long upper shadow on the green (white) candle as the DJIA approached prior resistance on May 1st signaled the trend may stall. A strengthening of this reversal signal was given the next day when a Hanging Man formed that was also a Harami. Hanging Man candles require confirmation which was given the following day when the DJIA closed well below the close of the Hanging Man. These three signals confirmed a top which was further bolstered with a Bearish Belthold Line the next day.
On June 6th a Tower Bottom was confirmed with the long green candle Bullish Belthold Line closing above the long red candle. Tower Bottoms by definition require small bodied candles between the two towers. These small bodied candles preceding the Bullish Belthold Line signaled a dampening of the downward momentum which was followed by confirmation in the form of the Bullish Belthold confirming the Tower Bottom reversal.
The long upper shadow of the green candle on June 19th was followed by a near-doji Harami signaling neutrality in the trend. Since this Harami was very close to a Hanging Man we needed confirmation in the form of a lower close the following day. That confirmation came in the form of a long red Bearish Belthold Line signaling the short run trend was lower.
July 5th witnessed yet another Harami (similar to Inside Day on barchart) signaling the trend was losing its breath. Confirmation came the following day with a close below the Harami.
The long lower shadow of the red candle above the MA200 and above the prior pivot point signaled the market was respecting this area as support. Though the red candle that formed on July 12th didn't fit the text book definition of a Hammer it had all the qualities of a bottom reversal. All that was needed was a long green (white) candle to follow and close above the Hammer's close and we witnessed just such a thing the following session in the form of a Bullish Belthold Line. Further support for the turn was added by the fact the Bullish Belthold missed qualifying as an Bullish Engulfing Pattern (Outside Day in bar charts) by two points at the open.
This is virtually a Bearish Engulfing Day.
More or less a Rising Three Methods pattern signaling a continuation of the bull trend.
The narrow bodied green (white) candle on Aug 17th followed by a Hanging Man Doji Harami at prior levels of resistance should have sounded the alarm bells that a reversal was imminent. Confirmation was received the following day when the long upper shadow and a lower close confirmed bullish momentum was exhausted.

ElanaGabba · 03-09-2016,

The charts are telling us more about bonds today than they are about stocks. But keep in mind the bond market - Treasuries in particular - dwarfs the equities market so maybe that's enough to clue us in on future money flows.

a.jpg

This pattern would qualify as a Harami in my book (inside day in bar charting). A small bodied spinning top which formed completely inside the real body of the long red candle Bearish Belthold Line signals the market is losing its breath and becoming more neutral with regard to trend. Looking to the left of the chart and applying more Western technical analysis we see that the Harami formed at the psychological level of approximately 1.50% on the Ten Year Note. More specifically the level is 155.5 to 156 basis points which appeared to be a level of support for three weaks back in June and a level of resistance in late August. Keep in mind Harami's need to be confirmed which would come in the form of a close above the real body of the Harami during tomorrow's session. An even stronger signal that the trend has reversed would be a close above the Bearish Belthold Line preceding the Harami.
I didn't put a highlight on the chart above but it may be worth noting that the potential reversal signal today came at the 40-45 level on the RSI which in most markets seems to be a level of support for up-trends. Failure to hold 40-45 on the RSI(14) would add evidence in building a case that yields have lower to go.

**epiluseyix** · 03-11-2016,

To save time I won't go in to a six month analysis for gold but I did want to include it today since the last two sessions look like they could be significant with respect to the near-term trend.

These two candle are nearly textbook examples of the formation of an Evening Star. An Evening Star is by definition a three candle pattern so of course this one is incomplete at the moment. The first candle is a long white (green) real body candle followed by a narrow body candle that gaps above the first candle to form a 'star.' The completion of the pattern occurs on the third day in the form of a black (red) candle that closes well into the real body of the first candle. If the middle candle were a Doji then the pattern is known as a Evening Doji Star. Either way this is a bearish reversal pattern. That it is forming at a level of potential resistance which includes the psychological level of $1,700/Oz. as well as where the market dropped to in the dramatic selloff on Feb 29 (point A) and failed to reclaim on March 26th and 27th (point B) adds weight to the potential signal.

How I would trade this would be to watch the price action tomorrow. If gold opens more or less flat on the session and sells off throughout the day I would then look to see if an Evening Star was forming. For the more risk tolerant trader you could take a short position in the late afternoon if it seemed rather clear that gold was going to complete the Evening Star pattern and close well into the body of the first of the three candles. If it appeared gold was going to close below the $1,670 to $1,675 range the probability increases that this was a near-term top in gold's advance as this would complete the Evening Star. For anyone not already in gold and looking to go long, sans a Bullish Belthold Line tomorrow I would wait another day to see what the price action tells us.

Last edited by a moderator: Mar 22, 2014
You owe it to yourself to set aside 19 minutes to watch the following (pass it on):
http://youtu.be/jboTeS9Okak

Thread: Japanese Candlestick Charting - a running exposition

Thread Tools

Display