A candlestick shows the high, low, open and close for a security each day. Sounds simple enough, but what can you really do with that information?
This article focuses on continuation patterns and how they could deny or confirm trends in today's markets, giving the investor a clearer picture of whether to hold his or her position or execute a buy/sell order.
We continue this look at candle charts with some additional patterns on both the bullish and bearish sides of the equation. On the bullish side of the market, we'll show you the engulfing pattern, harami and the harami cross. On the bearish side, we will have a closer look at the engulfing pattern, the evening star and both the harami and the harami cross.
Engulfing Pattern - Bearish
An engulfing pattern (bearish) develops in an uptrend when sellers outnumber buyers; this action is reflected by a long red real body engulfing a small green real body.
You can see the opening was higher than the previous day, and, during the trading session, the issue sold off with volume that was much greater than the previous session.
Engulfing Pattern - Bullish
An engulfing pattern on the bullish side of the market is the opposite of the previous pattern and takes place when buyers outpace sellers, which is reflected in the chart by a long green real body engulfing a small red real body.
As you can see, this is a chart of an issue in a downtrend that has now lost momentum. The buyers may be coming back into this issue, creating a trend reversal and bottoming out of this downtrend.
Evening Star - Bearish
An evening star (bearish) is a top reversal pattern that is very easy to identify because the last candle in the pattern opens below the previous day's small real body, which can be either red or green and closes deep into the real body of the trading range of the candle two days prior.
This pattern shows that investors are perhaps losing confidence in the issue and its direction. This thought process will be confirmed if the next day is another down session.
Harami - Bearish
A harami (bearish) is another very recognizable candlestick pattern that shows a small real body (red) completely inside the previous day's real body.
Technicians will watch very closely now because the bearish harami indicates that the current uptrend may be coming to an end, especially if the volume is light. Students of candlestick charts will also recognize the harami pattern as the first two days of the three inside pattern.
Harami - Bullish
Harami (bullish) is just the mirror reflection of the harami bearish. As you can see in the chart above, a downtrend is in play and a small real body (green) is shown inside the large real body (red) of the previous day. This tells the technician that the trend is coming to an end. The harami implies that the preceding trend is about to conclude. A candlestick closing higher the next day would confirm the trend reversal.
Harami Cross - Bearish
A harami cross (bearish) is a pattern of a harami with a doji instead of a small real body following up on the next trading session.The doji is within the range of the real body of the prior session.
Like the harami, the trend starts out in play, but the market then decides to reverse intraday. Volume is virtually non-existent and the pattern is closing at the same price as the issue opened. The uptrend has been reversed.
Harami Cross - Bullish
The harami cross, whether the bullish or bearish version, starts out looking like the basic harami pattern. The harami cross bullish is the exact opposite of the harami cross bearish and does not require any further explanation. Again, a trend has been reversed.
If you want to use candlestick charting to get a sense of where a stock is headed, you need to learn how to read this unique charting language. Continuation patterns allow you to get a glimpse of a stock's trend, and thus capitalize on its next move.