Using Japanese Candlesticks for Technical Analysis
The Dynamic Wealth Report
June 19, 2009
This Far East Market Timing Strategy Can Make You Rich
by Corey Williams, Editor
I’ll come right out and say it. The secret to getting rich
trading stocks is to buy low and sell high.
Ok, it’s not much of a secret. But market timing is a skill most
investors never master.
If you’re trying to time the market based on fundamentals, you’re going
about it all wrong. To make matters worse, you’re probably losing money. The truth is a good P/E ratio or solid earnings growth won’t tell you
where a stock’s price will be in the next day, week, or even month.
No, the best short term indicator is technical analysis.
Technical analysis looks at price patterns. You can think of price
patterns as a record of investors’ interpretation of the fundamentals.
In essence, it adds a psychological element to the market.
You must take market psychology into consideration in any market timing
strategy. Because in the end, a stock’s price moves because people are
buying or selling. And the only way to gauge market psychology is by the
price people are willing to pay.
One type of technical analysis I use is especially good at calling tops
and bottoms. A top or a bottom is where one trend comes to an end, and
then starts going in the opposite direction. Identifying the end
of one
trend, or a start to another, helps determine the perfect time to buy or
sell.
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That’s how you time the market!
In fact, Sector ETF Trader subscribers were able to lock in a 35% gain
thanks to this strategy… more on that in a minute.
What analysis technique am I talking about… Japanese candlesticks. These
charts are called candlesticks because the lines often look like, you
guessed it, candlesticks.
This method of price charting was developed by Japanese rice traders in
the 1700s. But it was virtually unknown in the western world until the
1990s. That’s quite a secret.
Why have western traders been so interested in Japanese candlesticks?
Because they work.
On a personal note, I enjoy using them because I find the patterns easy
to spot… once you know what you’re looking for. I also find the
terminology entertaining. You’ll find terms like: Three Advancing White
Soldiers, Gravestone Doji, and Counterattack Lines, just to name a few.
But entertaining or not, it’s all about performance. Let me give you an
example.
Take a look at this candlestick chart of GDX. You can see it had a great
run from mid-April until June.
At first, candlestick charts look a bit odd. The white lines (also called
the body) are days the ETF closed higher than the open. The black line
(or body) are days with a lower close. The lines extending out from the
bodies (shadows) mark the high and low reached during the day.
A lot of information is available at a glance. Each line tells you the
ETFs opening price, closing price, daily high, daily low, and if it
closed up or down for the day.
The last four days is when our trade got interesting. You’ll see a rare
chart pattern. It indicates a reversal of the uptrend. This one’s a
mouthful, it’s called Upside-Gap Two Crows. (The name reminds me of an
old Alfred Hitchcock movie. Clearly it implies bad things are about to
happen.)
On May 28th, GDX had a solid day closing higher.
Then on May 29th and 30th after gaping higher, the ‘two black crows’
appeared. This is an ominous sign GDX’s bullish momentum is fading. The
only thing that could save GDX from avoiding the Upside-Gap Two Crows
would be a strong rally above the previous day’s high on day four.
As you can see, it wasn’t meant to be. The early morning rally was turned
back once again. Since it failed to reach and stay at a new high, the
pattern was complete. It was time to sell.
And it’s a good thing we did. Look what happened next.
GDX fell off a cliff since then. It’s given back 23% of its gain and it
continues to fall. Clearly, reading the Japanese Candlestick allows us to
capture a big gain and avoid heartburn.
Our subscribers were able to capture 99% of the gain. That’s calling a
top to perfection.
***Editors Note: Corey’s new service,
Sector ETF Trader, has been on fire
since we launched it a few months ago. To see how he incorporates both
technical and fundamental analysis to generate HUGE short-term winners,
click here…
• Carnival (CCL) was upgraded by both Barclays Capital
and Wachovia. Despite rising fuel prices, they see the cruise line
industry as an area to invest in.
• Plum Creek (PCL) was downgraded to an “Underweight”
rating by JP Morgan. The reason for the downgrade? The analyst cited
near term challenges… honestly, who doesn’t have those?
• Robert W. Baird recently initiated coverage on EnerNOC
(ENOC). It’s a great little alternative energy company… if you don’t
know the company, give it a look.
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