Candlestick Reversal Examples from the Week of June 18th, 2007

This is the chart for HIG on June 20th,2007. This is an example of a bearish engulfing pattern. More importantly, notice the three small green bars in the middle. This would be an example of a continuation pattern that I've been seeing more and more. Most of us would trade this short until we saw our first green bar and then would cover the position. The real strength in these candles is catching the overall trend in a stock and waiting until we see a distinct reversal pattern before we cover. There is going to be profit taking anytime a stock is trending but as long as you hold your stop loss at the reversal, we should be able to catch more of these bigger moves.



This is the chart for AVT on June 21st, 2007. This is a triple hammer (triple tail) example of a trade that would be a losing trade before it ultimately reversed. The first hammer was formed in the third bar from the left. It actually looked like a good long opportunity once the fourth bar closed at a doji. The market took another leg down here taking AVT with it and you would have been stopped out. The bottom of this move was the double hammers (double tails) that was the low point here on the day. One strategy in a situation like this is to place a bid inside the middle of the candle tail with your stop loss just below the bottom of the hammer. Many times your stock wont be hit, and the trade will move without you. However if the candles show a double or triple hammer, you have gotten in at a great price and are able to give the trade more room to run by placing your stop loss lower than you normally would have.






This is the chart of the S&P 500 eminis on June 22nd, 2007. The market was in an overall downtrend for much of the day. The black box at the bottom of the chart is a clear example of double hammers (double tails). Considering the market was as weak as it was I covered all of my long positions once I saw the double tails in the top black box. What I wanted to stress here, was that we need so keep an eye on the overall market conditions to gauge specific trades. If the market had been in an overall uptrend, this would have been a long hold considering that the tails at the top of the chart aren't very significant. Once the second hammer formed here at the bottom, this was the low point for the market that day.







These are charts for MCO on June 20th and June 21th, 2007. These are text book examples of both a shooting star (6/20) and a hammer reversal pattern (6/21). If you are watching MCO everyday you'll notice that he doesn't necessarily have sharp price movements or long candles, however he seems to make dramatic movements whenever he shows visible tails. Just something to keep your eye on. Many of the stocks that we trade still have distinctive personalities, mostly because of the same groups of traders that trade these names. While MCO is technically a financial stock, he doesn't seem to trade the same as GS or LEH. The trends are smoother and have less choppiness (less tails). -MM