Market Participant Groups Candle Footprints
There are “time
progression” chart examples of one stock in this article, to help readers focus
on the candle patterns and Market Participants creating those patterns in the
charts. Therefore a portion of the chart has been covered in charts 1 & 2
creating a white space on the right side.
Candlesticks are a
language unto themselves. It takes a bit of practice reading the candlestick
patterns to be able to understand who is buying, where they are buying, and
when they stop buying.
When studying just
candlesticks you must also include Volume. This is because there are 3 pieces
of data that come from every stock transaction which are the Price, the Time,
and the Quantity of shares that exchanged hands. All 3 pieces of data are
required if you are going to do a proper and complete analysis. All too often,
Retail Traders think Volume is unnecessary or unimportant. This comes from 40-50
years ago when Volume was not as easy to come by, as the market was all manual
in those days. With the consolidated ticker tape, every trade is recorded
precisely with Price, Time, and Quantity stored for future reference. This
makes StockCharts.com totally reliable for analyzing stocks as the data is
pure, cleaned, and verified which is one reason why I recommend StockCharts.com to
my Students as an excellent charting software.
We are going to look
at Candlestick Pattern Analysis differently than you have before, unless you
are one of my TechniTrader Students.
When reading the
broad aspect of the price using candlesticks I prefer to start from the left
and move to the right of the chart. This analysis is not “finding a stock to
trade,” that is the super easy part of trading. This is about understanding the
relationship between the Candlesticks and Volume so that a clear picture of
what is going on appears, rather than just a jumble of white and black lines.
The chart example
below has a huge gap down, then a candle with a long wick and a small white
body. Volume has spiked to the top of the Volume Bar chart indicator window on
unusually high red, or down day Volume.
This is a High
Frequency Trading Firm HFT footprint and should be obvious on any chart. This
was preceded by a runaway trendline pattern which was speculative. Usually this
type of gap is either news or an earnings gap, however HFTs can also trigger in
the wrong direction.
The next day is a
extraordinarily long black candle that gaps slight at open, falls for the
remainder of the day, then moves up slightly in the last couple of minutes of
trading. The next several days are small black candles with 2 small white
candles. However price is not running down instead it is shifting sideways,
which is a big signal that even though price appears to be moving down it
actually is being supported by buyers with sufficient capital resources and
powerfully controlled orders that hold the stock at this level. If these large
lot buyers were not countering the selling, the price would be collapsing.
The stock moves down
slightly further then next day, then recovers with a candlestick that has a
tail that is as long as the body, see candlestick indicated by red arrow. The
next few resting days convert to a run up with small candles. Again we see
control of the entry Price and Volume just above average. Those larger lot
buyers took control of price and the sellers evaporated, causing the buying to
be revealed as more Professional buyers moved in.
However the stock
stalls at a around $39 and slip-slides down. This is partly profit taking and
partly a void of large lot buyers. As the large lot buyers halted their
automated orders at a specific high price, and with Professional Traders taking
short-term profits, the stock inches down but does not run down.
The stock now moves
down to the prior low, forms another small body candle with a long tail that is
white this time, then runs back up close to the prior high. Now you should see
that there is a PATTERN here. The larger lots are controlling their entry price
and the high range they will pay for the stock. This is important for Swing,
Day, and even Position Traders to recognize.
Profit taking starts
again, large lot buyers halt their buying and the stock gaps down going a bit
lower this time. However, this dip beyond the prior low buy in price triggers
more large lot buyers with a gap and run that again halt near a previous high
where buyers stopped buying.
IF this was
Professional Technical Traders, the runs would be more technical. This is
automated orders triggering on price and halting at price levels.
There have now been 3
hits on the high of the Buy Zone™ range. Often that is all that is needed to
expose the liquidity draw of large lot accumulation.
Professional Traders
drive price up on rising Volume, then quickly take profits ahead of a
resistance level. This is a technical candlestick pattern without a Buy Zone
restriction.
Since Professionals
use carefully constructed exit orders, the stock barely dips.
The stock runs up on
retail crowd and Smaller Funds buying action, smack into resistance and
ends with a reversal tailed candle as Professionals that held, sell into the
retail crowd buying frenzy.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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