Candlestic Charting, bullish and bearish engulfing, hammer, hanging man, candle charts

The sharp recovery suggests that the bearish sentiment may be beginning to wane and if a move
above the high of the Hammer days occurs during the next day's trading there is a stronger risk of
complete trend reversal.

In a Hanging man, during an uptrend there is a sharp sell off after the market. By the end of the
day, the market rallies to close at or near the high for the day.

This pattern definitely requires confirmation. The recovery in price over the day could mean the
bulls are still in control. However, a break to new highs on the next trading day is required to
confirm. Alternately, a decline to test the low of the Hanging Man day will suggest a trend reversal

A bearish engulfing candle occurs after a significant uptrend. Again, the shadows need
not be surrounded. Below you will find an illustration of a bearish engulfing candle:
The power of the engulfing candle is increased by two factors -- the size of the candle
and the volume on the day it occurs. The bigger the engulfing candle, the more

significant it is likely to be. A large bullish engulfing candle says the bulls have seized
control of the market after a downtrend. Meanwhile, a large bearish engulfing says the
bears have taken command after an uptrend. Also, if volume is above normal on the day
when the signal is given, this increases the power of the message.

(3)Bearish Harami

Bearish Harami Pattern is a two-candlestick pattern composed of a small black real
body contained within a prior relatively long white real body. “Harami” is an old
Japanese word for “pregnant”. The long white candlestick is “the mother” and the
small candlestick is “the baby”.

Recognition Criteria:

1. Market is characterized by an uptrend.
2. We see a long white candlestick on the first day.
3. Then we see a black candlestick on the second day whose real body is completely
engulfed by the real body of the first day. The shadows (high/low) of the second
candlestick do not have to be contained within the first body, though it's preferable if
they are.

Explanation:

The Bearish Harami Pattern is a sign of a disparity about the market’s health. Bull
market continues further confirmed by the long white real body’s vitality but then we
see the small black real body which shows some uncertainty. This shows the bulls’
upward drive has weakened and now a trend reversal is possible.

Important Factors:

It is important that the second day black candlestick has a minute real body relative
to the prior candlestick and that this small body is inside the larger one. The Bearish
Harami Pattern does not necessarily mean a market reversal. It rather predicts that
the market may not continue with its previous uptrend. There are however some
instances in which the Bearish Harami Pattern can warn of a significant trend change
- especially at market tops.

A confirmation of the reversal on the third day is required to be sure that the
uptrend has reversed. This confirmation may be in the form of a black candlestick, a
large gap down or a lower close on the next trading day (the third day).

(4) Bullish Harami Cross

Bullish Harami Cross Pattern is a doji preceded by a long black real body. The Bullish
Harami Cross Pattern is a major bullish reversal pattern. It is more significant than a
regular Bullish Harami Pattern.

Recognition Criteria:

1. Market is characterized by downtrend.
2. Then we see a long black candlestick.
3. Long black candlestick is followed by a doji completely engulfed by the real body
of the first day. The shadows (high/low) of the doji may not be necessarily contained
within the first black body, though it's preferable if they are.

Explanation:

The Bullish Harami Cross Pattern is a strong signal of disparity about the market’s
health. During a downtrend, the heavy selling reflected by a long, black real body; is
followed by a doji next day. This shows that the market is starting to severe itself
from the prior downtrend.

Important Factors:

The Bullish Harami Pattern is not a major reversal pattern, however the Bullish
Harami Cross Pattern is a major upside reversal pattern. Short traders will not be
wise to ignore the significance of a harami cross just after a long black candlestick.
Harami crosses point out to the bottoms.

A third day confirmation of the reversal is recommended (though not required) to
judge that the downtrend has reversed. The confirmation may be in the form of a
white candlestick, a large gap up or a higher close on the next trading day.

If you are a regular Swing Trader reader, then the inverted hammer should seem very
familiar. However, you may not be able to put your finger on exactly why it looks so
familiar.

The reason is that the inverted hammer is identical in appearance to the shooting star,
which we discussed in our December 8th, 2003 Swing Trader issue. The difference is
that the shooting star occurs at the end of a long uptrend. The inverted hammer, on the
other hand, occurs after a significant decline has taken place.

If you examine the inverted hammer carefully, it hardly looks like a bullish candle. Prices
opened low and then rallied strongly. By the close of trading, however, the stock has
given back almost all of the day's gains. That leaves a small real body and a very large
upper shadow. If anything, the candle looks bearish. The bulls could not sustain a rally,
so the bears took the stock back toward its lows for the day.

So, why should this candle potentially set up an important reversal? My theory is that the
inverted hammer is a signal that shorts are beginning to cover their positions.

Here is my reasoning. Since the inverted hammer can only occur after a sustained
downtrend, the stock is in all probability already oversold. Therefore, the inverted
hammer may signify that shorts are beginning to cover. In addition, traders who have
held long positions in the security, most of whom are now showing large losses, are often
quick to dump their shares by selling into strength. This will also serve to drive the stock
back down.

With this candle, it is imperative to watch the next day's trading action. If the stock opens
strongly and remains strong during the day, then a key reversal is likely in progress.

In a downtrend the market gaps open, but rallies strong to close above the previous days
midpoint. This pattern suggests an opportunity for the bulls to enter the market and support the
trend reversal. The Piercing Line pattern is the opposite of the Dark Cloud Cover.

A long black body followed by a white body.
The white body pierces the midpoint of the prior white body.

Occurs in a downtrend.

When a downtrend market is in place, fol owing by a Doji Star. Like the regular Morning Star, the third day
will support the reversal of the trend. It is more significant than the regular Morning Star pattern.

Recognition Criteria:

The first day is a black day which indicates the trend of the market.
The second day must be a Doji day.
The third day is a white day and supports the reversal of the trend.

(Confirmation is suggested.)

An Evening Doji Star is when a Doji Star is in an uptrend fol owed by a long black body. Like the regular
Evening Star, the third day will support the reversal of the trend. It is more significant than the regular
Evening Star pattern.

Recognition Criteria:

The first day is a white day which indicates the trend of the market.
The second day is a Doji day.
The third day is black day which supports the reversal of the trend.

(Confirmation is suggested.)

(12) Abandoned Baby

Bullish Abandoned Baby Bearish Abandoned Baby

Abandoned Baby pattern is similar to the family of Morning Star and Evening Star patterns. It is almost the
same as Morning Doji and Evening Doji Star. The difference is the shadows on the Doji must gap below the
shadows of the first and third days for the Abandoned Baby bottom.

Recognition Criteria:

The first day shal indicates the prior trend.
The second day is a Doji which gaps above or below the previous day's range.
The third day is the opposite color of the first day and gaps in the opposite direction.
There is no shadows overlapping between the Doji and other two days.

(Confirmation is suggested.)

(13) Trading the Upside Gap Two Crows Pattern

Description

The Upside Gap Two Crows is a three-day pattern. The upside-gap is created
between the long white candle at the top of an uptrend and the small black
candle of the second day. The black candle gaps open and pulls back before the
end of the day. Even though it has pulled back, it did not fill the gap. The third
day opens above where the first black candle opened. It can not hold at these
levels and pulls back before the end of the day. Closing lower than the previous
day, it has engulfed the small black candle's body. However, it still did not close
the gap from the white candle.

Criteria

1. A long white candle continues the uptrend.
2. The real body of the next day is black while gapping up and not filling the gap.
3. The third day opens higher than the second day's open and closes below
the second day's close. This produces a black candle that completelyengulfs the small black candle.
4. The close of the third day is stil above the close of the last white candle

Meeting Lines (or Counterattack Lines) are formed when opposite colored bodies
have the same closing price. The first Candlestick body is the same color as the
current trend. The second body is formed by a gap open in the same direction as
the trend. However, by the close, it has come back to the previous day's close.
The Bullish Meeting Line has the same criteria as the Piercing Line except that is
closes the same close as the previous day and not up into the body. Likewise,
the Bearish Meeting Line is the same as the Dark Cloud pattern, but it does not
close down into the body of the previous day.

Criteria

1. The first candlestick body should continue the prevailing trend.
2. The second candlestick gaps open continuing the trend.
3. The real body of the second day closes at the close of the first day.
4. The body of the second day is opposite color of the first day
5. Both days should be long candle days.