Candlesticks Chp 4 Reversal Pattrns Flashcards
Reversal Patterns are what technicians watch for price clues alerting them to ___________ and _________
a shift in market psychology and trend
the term “reversal pattern” is somewhat of a misnomer. Hearing that term may lead you to think of an old trend ending abruptly and then reversing to a new trend. This rarely happens. Trend changes usually occur __________________________
slowly, in stages, as the underlying psychology shifts gears.
A trend reversal signal implies that the prior trend is likely to change, but not _____________ ___________.
necessarily reversing
More indicative of trend change than reversal.
It is prudent to think of reversal patterns as _________________
trend change patterns rather than outright reversals.
Successful trading entails having both the _________ and __________ on your side.
Trend and probability on your side.
reversal indicators are the market’s way of providing a road sign, such as “Caution—Trend in Process of Change.” In other words, ______________________________.
the market’s psychology is in transformation.
You should adjust your trading style to reflect the new market environment.
An important principle is to initiate a new position (based on a reversal signal) only if that signal is _____________________________. Example
in the direction of the major trend.
Let us say, for example, that in a bull market, a top reversal pattern appears. This bearish signal would not warrant a short sale. This is because the major trend is still up. It would, however, signal a liquidation of longs. We could then look for a bullish signal on the correction to buy since the prevailing trend was higher.
______________ are candles with very long lower shadows and a small real body at the top end of the range. These lines are fascinating in that these lines can be either bullish or bearish according to ________________________.
the market environment
If an umbrella line emerges during a downtrend, it is a signal that ___________________________. In such a scenario, this umbrella line is labeled a _____________.
the downtrend should end
a hammer,
as in “the market is hammering out” a base. The Japanese word is takuri. This word means “trying to gauge the depth of the water by feeling for its bottom.”
an umbrella line after a decline is a bullish signal called a _________
a hammer.
If an umbrella line emerges after a rally, it is a potential top reversal signal ominously called ___________________
a hanging man.
The name “hanging man” is derived from the fact that it looks like a hanging man with dangling legs.
In regards to umbrella /hammers and hanging man lines ………what does “buy from below and sell from above.” mean?
it’s a bullish sign after a falling market (“buy from below”) and potentially a bearish sign after a rising market (“sell from above”).
The hammer and hanging man can be recognized by three criteria:
- The real body is at the upper end of the trading range. The color of the real body is not important.
- It has a long lower shadow that should be at least twice the height of the real body.
- It should have no, or a very short, upper shadow.
There are three aspects that differentiate the hanging man from the hammer—
trend, extent of the move before the candle line, and confirmation
- Specifically: Trend: A hammer must come after a decline. A hanging man must come after a rally.
- Extent of the move before the candle line: A hammer is valid even if it comes after a short-term decline, but a hanging man should emerge after an extended rally, preferably at an all-time high.
- Confirmation: As will be addressed later, a hanging man should be confirmed, while a hammer need not be.
In regards to a hammer or hanging man the ___________er the lower shadow, the ___________er the upper shadow; the ________er the real body, the more meaningful the bullish hammer or bearish hanging man.
longer
shorter
smaller
The color of the real body of the hammer can be .
green or red the success of the hammer is not dependent on the color of its real body.
Successful trading with candle charts requires an understanding not only of the candle patterns, but also of _____________ and _________________.
where the candle pattern appears
and
in the context of risk/ reward analysis.
Is the hammer a bearish or bullish sign?
Bullish
Is the hanging man a bearish or bullish sign?
Bearish
The hanging man has the same shape as the hammer; the only difference is that a hanging man _______________
comes after an advance
Because a long lower shadow is viewed as a plus, and since the hanging man has such a shadow, it is especially important that one wait for bearish confirmation with the hanging man. At a minimum this would be
a lower opening under the real body of the hanging man. But I usually recommend a close beneath the hanging man.
The reason for waiting for a close under the hanging man’s real body is that if the market closes lower the next day, ___________________________
those who bought on the open or close of the hanging man day (and lots of trading occurs at these two times) are now left “hanging” with a losing position.
I would also like to see the hanging man at ___________________________or _______________________. In this scenario the longs entering on the hanging man session are in their position at new highs, thus making them more nervous. Consequently, those longs might decide to ________________________________________
an all-time high, or at least at a high for a significant move
back out of their now losing position. That could cascade into more selling pressure.
if the market does not close under the hanging man’s real body, then the bull trend .
remains entrenched
patterns. The engulfing pattern is ________________________________ with two opposite color real bodies composing this pattern.
a major reversal signal
a bullish engulfing pattern. The market is falling. Then a bullish real body wraps around, or engulfs, the prior period’s bearish real body (hence its name).
a bearish engulfing pattern. Here the market is trending higher. A white real body engulfed by a black real body is the signal for a _________. This shows that supply has _______________________.
top reversal
overwhelmed demand
There are three criteria for an engulfing pattern:
- The market has to be in a clearly definable uptrend (for a bearish engulfing pattern) or downtrend (for a bullish engulfing pattern), even if the trend is short term.
- Two candles comprise the engulfing pattern. The second real body must engulf the prior real body (it need not engulf the shadows).
- The second real body of the engulfing pattern should be the opposite color of the first real body. (The exception to this rule is if the first real body of the engulfing pattern is a doji. Thus, after an extended fall, a doji engulfed by a very large white real body could be a bottom reversal. In an uptrend, a doji enveloped by a very large black real body could be a bearish reversal pattern).
Some factors increasing the likelihood that an engulfing pattern could be an important turning signal are:
- If the first day of the engulfing pattern has a very small real body (i.e., a spinning top) and the second day has a very long real body. The small first real body candle reflects a dissipation of the prior trend’s force and the large second real body proves an increase in force behind the new move.
- If the engulfing pattern appears after a protracted or very fast move. A fast or extended move creates an overextended market (either overbought or oversold) and makes it vulnerable to profit taking.
- If there is heavy volume on the second real body of the engulfing pattern.
A prime use of the engulfing pattern is utilizing them as _______________.
support or resistance
use the high of the two candle lines that make the bearish engulfing pattern. That high becomes our resistance (based on a close). The same concept is used for the bullish engulfing pattern. With that I have found that the lowest low of that pattern should become support.
by the time a bullish engulfing pattern is completed (remember, we need to wait for the close of the second session before we know it’s a bullish engulfing pattern), the market may be well off its lows. As such, I would feel that it has gotten away from an attractive buying area. In such a scenario, we can ___________________________________________________and then consider stepping in from the long side.
wait for a possible correction to our support area at the lows of the bullish engulfing pattern
For those who are momentum players, the break above a bearish engulfing pattern could be viewed as _________________and a time to consider buying.
an indication of a new upleg
the dark-cloud cover is a dual-candle pattern that is a ________________________ or, at times, at the top of a __________________.
top reversal after an uptrend
congestion band
The first day of the dark cloud pattern is a strong __________ real body. The second day’s price opens above the prior session’s high (that is, above the top of the upper shadow). However, by the end of the second day’s session, the market closes deeply _________________________________
Bullish
within the prior day’s bullish body.
The greater the degree of penetration into the bullish real body, the more likely this is ___________. Some Japanese technicians require more than a ________percent penetration of the Bearish session’s close into the Bullish real body. If the black candle does not close below __________________of the bullish candlestick, it may be best to wait for more bearish confirmation following the dark-cloud cover.
a top
50%
the halfway point
Some factors intensifying the importance of dark-cloud covers include:
- The greater the penetration of the black real body’s close into the prior white real body, the greater the chance for _________.
- During a prolonged ascent, if there is a strong white day that opens on its low (that is, a shaven bottom) and closes on its high (that is, a shaven head) and the next day reveals a long black real body day, opening on its high and closing on its low, then a ____________________________black day has occurred.
- If the second body (that is, the black body) of the dark-cloud cover opens above a major resistance level and then fails, it would prove the bulls were unable to take control of the market.
- If, on the opening of the second day, there is very heavy volume, then a ______________could have occurred. For example, heavy volume at a new opening high could mean that many new buyers have decided to jump aboard ship. Then the market sells off. It probably won’t be too long before this multitude of new longs (and old longs who have ridden the uptrend) realize that the ship they jumped onto is the Titanic. For futures traders, very high opening interest can be another warning.
a top
shaven head and shaven bottom
buying blow off
cover. The bearish dark-cloud cover’s counterpart is the bullish _________________
piercing pattern
The psychology behind the piercing pattern is as follows: The market is in a downtrend. Then the market surges toward the close, managing not only to close unchanged from the prior day’s close, but sharply above that close. The bears will be second-guessing their position. Those who are looking to buy would say new lows could not hold and could view it as an opportunity to _______________________________
buy as well as establish a new support level.
one should view a non-ideal candle pattern by (1) _______________ and (2) _______________. These two factors will help us gauge if the less-than-perfect pattern could have the same implications as a more classicly defined candle pattern.
how it was formed
within the overall market picture
