Japanese Candlestick Charting - a running exposition

[MauriceMay]

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.

[MazinMn]

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.

[MichaelNix]

Unfortunately for anyone reading this post looking for a grand revelation the following discussion is going to disappoint. Today's action in the markets we're following was mired in equilibrium with very little to add by way of changes in trend and it appears the markets are on pause ahead of ECB president Draghi's comments tomorrow.

[MichaelDrap]

Was out of town a couple days and couldn't devote the time to analysis. The last two trading sessions were quite eventful with confirmation on Thursday of the market's suspicion that ECB president Mario Draghi would employ a bond buying program for distressed countries - the PIIGS. This was followed by a sub-par non-farm payroll report on Friday that came in at 96,000 leading to the market betting on more stimulus from the Federal Reserve. A couple of caveats to keep in mind as we look at the charts: First, the EU bond buying program is of the sterilized variety meaning no increases in the monetary base will occur as a result of the plan as it was laid out on Thursday. This does, however, have implications for US Treasuries as money flows may leave the safe-haven assets and move into the three-year-and-under maturities that will be purchased by the ECB. This of course translates to higher Treasury rates in the USA. Second, the NFP report was bearish at under 100,000 jobs and while the odds are probably greater than 50% that the Fed will initiate further easing in some form or another there is no guarantee this announcement comes at the September meeting which leaves significant downside risk to risk-on assets if the Fed disappoints those betting on stimulus.