How Candlestick Double Tops in May Predicted a Major Decline in the Dow |
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| By candleman | ||||
This method of display came to be known as “Japanese Candlesticks.” The fattened-out bars can indeed look like candles, with “wicks” (sometimes called “shadows”) extending from the tops and bottoms of the white or black cylinders to the upper and lower ranges of prices. Candlestick charting was introduced to the United States 25 or so years ago, and is now gaining new acceptance every day. In time, it may well become the standard form of price presentation. One of the great advantages of Candlestick display is that it does not attempt to usurp or to override any of the “Western” indicators to which we have become accustomed. Rather, it works in great harmony with them; and, if anything, it tends to enhance their value. More and more, Candlestick technical analysis has come to be the foundation of many an investment newsletter, trading chat room, and educational forum, the subject of which is the pattern and formation development which is characteristic of this method of price display. The Candlesticks are sometimes uncanny in their ability to foretell major reversals of trend. A fine example is found in the price action of the Dow Industrials Index during May 2008. The Weekly charts of the Dow for the weeks of May 2 and May 8 showed a clear “double top” (in “Western” terms) together with two strong “Bearish Engulfing” patterns in a row. Closer investigation by use of the Daily charts reveals a second double top, which was formed by the price bars of May 2 and May 19, together with (again) strong Bearish Engulfing patterns formed by the next day’s trading. These two sets of signals, together, were powerful predictors of a meaningful price decline to follow. In fact, the prediction was amply fulfilled, as prices fell from a high of about 13,125 on May 19 to a low of about 10,823 on July 15 – a drop of 17.5%. This is an excellent example of mutual reinforcement of the signals which are given off by “Western” indicators and by Japanese Candlesticks. When used together, they can be a powerful tool in every investor’s and trader’s approach to the markets. |
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