Many investors are afraid to buy after a gap up. The rationale being that they don’t like paying up for a stock that may have already moved 3%, 5%, 10% already that day.Witnessing a Candlestick “buy” signal prior to the gap up provides a basis for aggressively buying the stock. If it is at the bottom of a trend, that 3%, 5%, 10% initial move may just be the beginning of a 25% move or a major trend that can last for months.Huge gains can be made by finding and knowing the significance of a candlestick signal.
Figure 6 - XMSR, XM Satellite, has signs of bottoming.
The Homing Pigeon, a form of Harami, shows the selling has stopped. A small Hammer, then a Doji/Hammer should be evidence that the sellers are losing strength. The Doji/Hammer should produce an alert that there is major indecision going on at this point. Watch for a strong open the next day.
Figure 6 – XM Satellite
The bigger the gap up, the more powerful the new trend will be. This was evidenced by another small gap up a few days later. Traders may have gotten out at the $8.00 range,still a good return. The longer-term investor should have gotten out at the $16.00 area.
The $12.00 area could have been scary, but notice that after a gap up at $12.25, the lower close still didn’t come into the last white body’s range. The next black candle also didn’t close in the white candle’s range. Profit taking. The bears could not move the price back to the big white candle’s trading range. The bulls took note of this and came back strong after their confidence was built back up. This moved prices to the next level. When prices gapped higher at the $16.00 range, then gapped down from that level, the selling was
picking up strength. If the position was not liquidated then, it would have been logical to do so a few days later when a new high was not reached and an Evening Star formation was seen. Getting out at $15.50 around 5/23 would have produced a very nice 300% plus profit for a little under two months time. That is what you use Candlestick analysis for.
Getting rid of the losing trades quickly.Finding and exploiting the maximum gains from the good trades. Finding! An important element. The gaps produce the opportunities.
Figure 7,Coach Inc., illustrates when a trend is starting out strong.
If investors had been observing these signals, they would want to see bullish signals confirming the reversal. The gap open to $26.00 would have the Candlestick investor getting in on the open. Over the next 7 trading days, the trader could have realized a 27% gain. The long-term investor would have more than doubled those gains over the next few months
The Morning Star signal is an obvious visual reversal signal. A more potent signal is the Abandoned Baby signal. This is formed by the sellers gapping down a price at the bottom of a trend, trading through a day of indecision with the bulls, then the bulls taking over the next day, gapping prices back up and moving them higher. The bigger that gap, the more powerful the next up move.
As seen in Figure 8 - MERQ, Mercury Interactive Corp. The weak sellers finally give up and get out at the bottom. They are met with bargain hunting bulls. The trading that day forms a Spinning Top, a day of indecision, almost like that of a Doji