Charting & TA Ch6: More Formations

Question 1

Three Black Crows

Answer 1

This pattern consist of 3 consecutive long-bodied, negative, candlesticks that have closed lower than the previous day with eacch session’s open occurring within the body of the previous candle.

• Three black crows is a bearish candlestick pattern used to predict the reversal of a current uptrend.
• Traders use it alongside other technical indicators such as the relative strength index (RSI).
• The size of the three black crows candles and the shadow can be used to judge whether the reversal is at risk of a retracement.
• The opposite pattern of three black crows is three white soldiers, which indicates a reversal of a downtrend.

Question 2

Three White Soldiers

Answer 2

A bullish candlestick pattern. This pattern consists of three consecutive long-bodied positive candlesticks that have closed higher than the previous day, with each session’s open occurring within the body of the previous candle.

• Three white soldiers are considered a reliable reversal pattern when confirmed by other technical indicators like the relative strength index (RSI).
• The size of the candles and the length of the shadow is used to judge whether there is a risk of retracement.
• The opposite pattern of three white soldiers is three black crows, which indicates the reversal of an uptrend.

Several things to consider:
1. It is very similar to the Bullish Harami.
2. After the price closed at the bottom of the negative candle, the price ‘Gapped’ up the following day to open for trading higher than it closed the previous day.
3. It NEVER traded lower than it opened. We know this because there is no WICK on the lower end of that candle. So this would be our first signal that a reversal was about to happen.
4. Then of course the huge engulfing candle the following day would serve as additional confirmation if the Trader wanted to wait for it to form.

Question 3

What can we learn from this chart?

Answer 3

• Notice the last bar on the right side of the chart. That day the stock opened and closed at practically the same price and formed a Hanging Man candle.
• The day before was a “Spinning Top,” an early warning of a change in direction.
• Just as important as other points made, on the right side of the chart, the stock is once again reaching the $120 range. This is where it was on the left side of the chart when it dropped over the course of about 14 days to find support.
• RESISTANCE: Yes, the $120 price range is upper resistance for this stock. It could not penetrate the $120 range in February on the left side of the chart and here it is 30 days later reaching that level again.
• VOLUME: When the stock sold off for 14 days and then found support. The volume increased. Now think trading psychology again. The buyers up at the $120 range are obviously giving up, afraid of further losses, and the Pros have been sitting idly by waiting for the stock to reach support. When support is reached, they step in. So you have the informed buyers moving back in to the stock and the uninformed sellers throwing in the towel at the same time, thus, the increased volume, and no further decline.

Question 4

What would we do if we were going to trade or invest in this stock?

Answer 4

1. If you were going to trade this stock, or even invest for the long term, why would you be buying it at the $118 to $120 range? You wouldn’t! But remember the Stock Market is a zero sum game. Someone bought that stock at $120, and someone sold it!
2. Who are the likely ‘Sellers’ at the $120 range and who are the likely ‘Buyers’ at the $120 range? The Pros are the ones that were buying it at the support level around $100 and those buyers are now the Sellers at $120.

– The buyers at $120 are obviously inexperienced and uninformed and have no training on chart analysis. They are jumping in hoping the stock will continue to advance.