*Japanese Candlestick Charting - a running exposition*

[AgrikGex]

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.

[AlbertBit]

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.

[ajzohrnd77]

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.

[AlbertRict]

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.

1. 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.

[admin]

So there you have it, the markets appear to be pausing ahead of the meeting of the ECB in anticipation of some direction on how Draghi is going to proceed. Is he going to initiate a European version of large scale asset purchases (QE) or is he going to try and talk the markets off the ledge with more lip service? It seems as though that is the question traders in four markets - Treasuries, equites, gold, and forex - are asking themselves. One can take comfort in that we should have our answer tomorrow.